Compliance November 23, 2010

IRS: No Mandatory Withholding for In-plan Roth Rollovers

Plan sponsors who are allowing direct Roth rollovers from 401(k) and 403(b) plans don’t have to worry about mandatory withholding for those “distributions.”
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According to a notice posted by the Internal Revenue Service on its website, mandatory 20% withholding does not apply to in-plan Roth direct rollovers.

On September 27, President Obama signed the “Small Business Jobs and Credit Act of 2010,” which allows the taxable transfer of a participant’s contributed pre-tax money to an in-plan Roth option. Previously, a participant who wanted to convert to a Roth had to do it outside a plan, to a Roth IRA (see Inside “Out”?).

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More specifically, the IRS noted that Section 2112 of the Small Business Jobs Act (Public Law 111-240), allows participants to make rollovers from their 401(k) and 403(b) plans to their designated Roth accounts (an “in-plan Roth rollover”) after September 27, 2010.  The taxable amount rolled over is includible in income equally in 2011 and 2012, unless the taxpayer elects to include it in 2010.  The additional tax under section 72(t) does not apply to these rollovers. 

The IRS says that the amount rolled over should be reported in box 1 (Gross distribution), the taxable amount in box 2a, and any basis in the rollover in box 5 (Employee contributions). Further, Code G in Box 7 on Form 1099-R should be used.

The notice goes on to say that distributions made to plan participants in 2010 from designated Roth accounts must be reported on a separate Form 1099-R, and that the portion of a distribution from a designated Roth account that is allocable to an in-plan Roth rollover must be reported on a Form 1099-R.  “Report the distribution as you would any other distribution from a designated Roth account; however, in the blank box to the left of box 10, enter the amount of the distribution allocable to the in-plan Roth rollover”.

The IRS notice is online at http://www.irs.gov/formspubs/article/0,,id=109875,00.html

The “Changes to Current Tax Forms, Instructions, and Publications” also contains information relevant to:

  • Change to Form W-11, HIRE Act Employee Affidavit
  • Changes to 2010 Forms W-2 series, W-3 series, and Instructions, due to Hiring Incentives to Restore Employment (HIRE) Act
  • Correction to 2010 Instructions for Forms W-2 and W-3
  • Changes to Publication 15 (Circular E), Employer’s Tax Guide (for use in 2010)
  • Correction to Publication 15, (Circular E), Employer’s Tax Guide, for use in 2010. 

More information about the Roth in-plan rollover option is available at http://www.plansponsor.com/MagazineArticle.aspx?id=6442475310&magazine=6442475347 

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