WASHINGTON (Nov. 30, 2010) — Employers can add a feature to their 401(k) plans by the end of the year to allow participants to transfer 401(k) plan account balances to Roth 401(k) accounts and take advantage of a soon-to-expire one-time tax break without having to formally amend their 401(k) plans until the end of 2011, the Internal Revenue Service (IRS) announced Nov. 26.
Normally, such discretionary amendments have to be adopted by the last day of the plan year in which an amendment is effective.
But in order to give employers more time to adopt such an amendment and enable participants by the end of 2010 to make 401(k) to Roth 401(k) transfers, the IRS in Notice 2010-84 said employers offering such a feature this year would not have to formally amend their plans until Dec. 31, 2011.
The extra time “is very welcome news,” said Marina Edward, a senior consultant with Towers Watson & Co. in Chicago.
That rollover feature was included in a small-business jobs bill Congress passed in September and signed into law by President Barack Obama. If employers add the conversion feature this year, employees who roll over funds into a Roth 401(k) will get an extra tax break.
Under the law, employees who roll over funds from their regular 401(k) plan to a Roth 401(k) account by the end of this year can pay taxes that are due on the money in equal parts in 2011 and 2012 rather than pay the entire tax liability next year.
The notice also resolves numerous other questions employers and others had raised about the rollover provision. For example, the notice makes clear that an employee will not be required to obtain spousal consent before transferring funds from the traditional 401(k) plan to a Roth 401(k) account.
In addition, the notice reiterates previous guidance that the 20 percent withholding tax imposed on certain pension distributions will not be imposed on 401(k) plan balances that employees roll over to Roth 401(k) accounts.
The notice is available at the IRS website.
This report appeared in Business Insurance magazine, a Chicago-based sister publication of Tire Business.