Roth 401(k)

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added the availability for Plan Sponsors to offer participants the opportunity to contribute after-tax Roth deferrals to an existing 401(k) Plan. While these provisions are available as of January 1, 2006 , they can also be implemented at any time after January 1, 2006 .

All plans adopting the Roth 401(k) provisions will need to be amended before the last day of the plan year in which Roth 401(k) contributions are made. Until the IRS issues final Roth 401(k) regulations (expected in 1 st quarter 2006), definitive guidance is not available. If you intend to add the Roth 401(k) provisions to your plan, and before your participants begin making Roth 401(k) contributions, you will need to address the following matters:

Contact your payroll provider to determine when they will be ready to handle this deduction properly. Unlike Traditional 401(k) deferrals which are pre-tax, Roth 401(k) deferrals are after-tax contributions. In addition, if your payroll provider is calculating a match on an ongoing basis, they will need to be able to include the Roth 401(k) deferrals in the calculation.
Contact your Retirement Plan Representative at TSC to coordinate the date your investment company will be able to accept the Roth 401(k) deferrals. You will not be able to implement the Roth 401(k) feature if your record-keeper is not prepared to track or account for the Roth 401(k) deferrals separately from Traditional 401(k) deferrals. When necessary, TSC will coordinate the setup and contribution deposit procedures with your investment company.
Revise your Participant Payroll deduction election form and provide educational materials to the participants. Keep in mind that each participant's situation will be unique and their current tax rate compared to their belief in what their tax rate will be at the time of their retirement will need to be considered.

We have drafted an election form and informational handouts for this purpose. These materials will be forwarded after we have been contacted by you to implement the Roth feature.
Amend the plan and SPD. If TSC is your document provider, we will prepare and forward this documentation to you within the time frame stipulated by the IRS. If TSC is not your document provider, you should contact your document provider to complete this amendment for you. If you do not have an active relationship with your document provider, contact us so we can discuss how to move your Plan document to TSC.

The following list is not intended to be exhaustive, but includes some of the administrative items from the proposed regulations that should be considered when making the decision whether or not to add the Roth 401(k) feature:

Administrative items to consider before adding the Roth 401(k) feature to your plan

Roth contributions are taxed as wages at the time of their payroll withholding and are always tax free upon withdrawal. Earnings are tax free at the time of withdrawal if the participant is either age 59½, disabled or deceased AND at least 5 tax years has elapsed since the first Roth contribution was deposited into the plan.

The participant election to contribute 401(k) deferrals is irrevocable, meaning the participant cannot change them from Roth to Traditional 401(k), or vice versa, after they have already been made.

The annual limit and catch-up limit for deferrals includes both Traditional 401(k) and Roth 401(k) deferrals. Both types of deferrals are tested together under the ADP test when applicable.

Your matching contribution formula, if any, will be applied to both the Traditional 401(k) and Roth 401(k) deferrals and will be tested as a single match under the ACP test.

There will be increased complexity in tracking cumulative Roth 401(k) deferrals from year to year, tracking the beginning and ending of the 5-year clock, and processing more complicated distribution requests. This will add additional administrative costs to the plan.

TSC will provide additional information once the IRS issues final regulations. At that time, if you're interested in implementing the Roth 401(k) provisions, we'll consult with you to ensure that you take full advantage of this opportunity. If you have any further questions, please contact your Retirement Plan Representative at TSC at 952-806-4300.

TSC will keep you informed as the rules regarding Roth 401(k) plans are finalized so you can add this feature to your plan as soon as possible and begin taking advantage of this opportunity. In the meantime, if you want more information about the Roth 401(k) feature, we have links to various articles on the subject on our website. Please go to www.tsc401k.com and click the “Roth 401(k) Resources” button. We update this regularly as new articles become available. Look for another mailing from us after the IRS issues the final rules and we have the details we need to provide this service. Please refer to the articles listed below about the Roth 401(k).

Opinions expressed in these articles are those of the respective authors and they do not necessarily reflect the position of TSC We offer these links as a resource for the convenience of visitors to our website who want information about Roth accounts in 401(k) Plans.

The Book on the Roth 401(k) and 403(b) and Why Your Business or Organization Must Have One (maybe) (Trucker Huss, 3/6/06)

Comprehensive IRS Guidance on Roth 401(k) and 403(b) Plans - (9 pages, Groom Law Group - 2/3/06)

Roth 401(k) Roadmap for Employers - (McDermott Will & Emery, 1/24/2006)

FAQs from the IRS on Roth 401(k) - (Internal Revenue Service, 1/12/06)

A Word to the Wise on Roth 401(k)s - (Market Watch 1/12/06)

Tax Diversification and the Roth 401(k). This report analyzes the technical features of the new Roth provision and suggests which participants should—and those who should not—consider using the new feature (Vanguard Center for Retirement Research, 10/31/2005)

Roth 401(k) Calculator Tool - (401khelpcenter)

Roth 401(k) Brochure with comparison table - John Hancock