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New Law Allows Governmental 457(b) Plans to Offer Roth Accounts

By: Joann Albrecht, CPC, QPA, Plan Technical Consultant, and Bob Beasley, CRC, CIC, Communications Consultant, Nationwide Retirement Solutions

Effective January 1, 2011 – technically, “in employee tax years beginning after December 31, 2010” – governmental 457(b) plan sponsors may allow employee contributions to designated Roth accounts in their plans. The new option was made possible when Congress enacted and on September 27, 2010, President Barack Obama signed the Small Business Jobs Act of 2010.

• Sponsors must amend their plan documents to reflect the changes, if they want to offer them.

• Plan administrators will need to separately track and report Roth accounts; recordkeeping systems may need to be modified to accept designated Roth contributions and conversion/rollovers.
• Employers may need to modify plan materials and communications, and offer additional employee education concerning the Roth concept and its availability in their plans.

Topic	Designation Roth Elective Deferral Accounts	In - Plan Conversion  to Roth Elective  Deferral Account	Roth and Deemed Roth IRAs
Definitions	Roth elective deferral contributions within an eligible retirement plan are: -  Subject to most of the rules that govern the 401(k), 403(b) or 457(b) plan -  After-tax elective salary deferrals -  Coordinated with pre-tax elective deferral limits -  Included in participant’s gross income at the time of deferral. -  Do not affect Roth IRA contributions.	Allows participants to convert/ roll over taxable eligible rollover distributions to a Roth elective deferral account within the same plan.	Roth IRA A tax-favored individually owned account that accepts non-deductible after-tax contributions from taxpayers who meet prescribed income requirements. Deemed Roth IRA A separate account or annuity maintained under an employer- sponsored retirement plan to accept voluntary employee after-tax contributions and that meet the requirements of a Roth IRA. It is subject to Roth IRA rules and not those of the employer’s retirement plan rules, or a traditional IRA. Both traditional and Roth deemed IRAs may be included in: - 401(a) qualified plans, including 401(k) plans, - 403(b) plans, and - Governmental 457(b) plans.
Effective Date for Designated Roth Accounts	Governmental 457(b) Plans Beginning after Dec. 31, 2010. 401(k) & 403(b) Plans Have been available since 2006.	401(k) & 403(b) Plans After September 27, 2010 Governmental 457(b) Plans Tax years after 2010.	Roth IRA Since 1998 Deemed Roth IRA Plan years beginning after 2002
Availability	May be included only in governmental 457(b), 401(k) and 403(b) plans as part of the elective salary deferral account.	Plan must have a provision for in-plan conversions and have established a designated Roth account before in-plan conversion amounts may be contributed to the plan’s designated Roth account.	Roth IRA Available to taxpayers whose modified adjusted gross income falls within prescribed limits for annual ongoing contributions, excluding rollovers and conversions. Deemed Roth IRA Same as Roth IRA. Employers may establish eligibility requirements for the deemed Roth IRA that differ from the employer’s retirement plan.
Requirements	Designated Roth accounts may be established only in plans that offer employee pre-tax elective deferral contributions and are subject to the plan’s eligibility requirements. Elective deferrals must be designated as a Roth elective deferral or pre-tax elective deferral before contribution is made to the plan. Roth elective deferrals must be accounted for separately within the plan’s elective deferral account Included in the deferral limits ($16,500 for 2010).	Distribution must be a taxable eligible rollover distribution, and plan must have a Roth elective deferral account Plan may specify other to eligible rollover distributions that may be converted and contributed to the plan’s designated Roth account In plan Roth conversions are treated as rollovers and do not count in the plan’s annual contribution or catch-up limits.	Roth IRA Contributions held in Roth IRAs cannot be part of a traditional deductible or non-deductible IRA. Deemed Roth IRA Same as above. Contributions, earnings and charges are tracked separately in the deemed Roth IRA and not part of the employer plan or the deemed traditional IRA. Note: Deemed Roth IRAs may be held in the same trust that holds traditional deemed IRAs provided that the IRA trustee maintains separate accounts and each IRA is designated as either a Roth or traditional IRA.
Automatic Enrollment	Permitted	N/A	Roth IRA—N/A Deemed Roth IRA May be used with deemed traditional and Roth IRAs.
Coordination with Other Elective Deferral Plans	401(k) and 403(b) Plans Pre-tax and designated Roth elective deferrals are coordinated with each other under all 401(k) and 403(b) plans. 457 Plans Pre-tax and Roth deferrals are coordinated under all 457(b) plans.	Not subject to plan’s annual contribution limits or any deferral coordination rules.	Roth and Deemed Roth IRAs Coordinated with all contributions to other IRAs both Roth and traditional IRAs, including deemed IRAs.
100% Vesting	Required.	Required.	Required.
Allocation of      Forfeitures, Matching and Employer Non-Elective Contributions to Roth Elective Deferral Account	Not permitted.	Not permitted.	Roth IRA – N/A Deemed Roth IRA Matching contributions or forfeitures from the employer’s qualified plan cannot be allocated to the deemed Roth IRA.
Loans, Hardships and Unforeseeable Emergency Distributions	May be used for loans, hardships and unforeseeable emergency distributions if plan permits.	N/A	Roth IRAs and Deemed Roth IRAs Not applicable. IRAs cannot be used as collateral for any type of loan. Hardship and unforeseeable emergency distributions are not necessary because IRA accountholders can access the money in their IRAs for any reason at any time.
Conversion of Pre-Tax Elective Deferrals to Designated Roth Elective Deferrals	See in-plan conversions.	Plan may permit the taxable portion of an eligible rollover distribution to be converted and contributed to the plan’s designated Roth elective deferral account.	Roth and Deemed IRAs Traditional IRAs may be converted to Roth IRAs regardless of an individual’s tax filing status or modified adjusted gross income after 2009.
Conversion of Roth Elective Deferrals to Pre-Tax Deferrals	No.	No.	Roth or Deemed Roth IRAs Roth and Deemed Roth IRAs can be re-characterized as traditional or deemed traditional IRAs.
Conversion of Other Pre-Tax Contributions	See in-plan conversions.	The plan document must specify if other taxable eligible rollover distributions can be converted and rolled into the Roth elective deferral account.	N/A
Catch-up Contributions (Dollar Limit)	Age 50+ Catch-up Coordinated 401(k) and 403(b) catch-up contributions, both pre-tax and Roth deferrals cannot exceed $5,500 for 2010. 457 plan Catch-up cannot exceed $5,500 for 2010 for Age 50+ Catch-up contributions to all 457 plans. Special 457 catch-up Pre-tax and Roth elective deferrals, including Special 457 Catch-up, cannot exceed a total of $33,000 for 2010.	N/A Catch-up contributions may be converted when they are eligible to be distributed from the plan in an eligible rollover distribution.	Roth and Deemed Roth IRAs Total IRA catch-up contributions to all IRAs (Roth and traditional including deemed IRAs) cannot exceed $1,000.
Withdrawal Restrictions	Same as those for pre-tax elective deferrals.	Same as those for pre-tax elective deferrals.	Roth IRA / Deemed Roth IRA Distributions are available at anytime but may be subject to taxes and penalties.
Required Minimum Distributions	Apply to both participants and beneficiaries.	Apply to both participants and beneficiaries	Roth and Deemed Roth IRAs Accountholders are not subject to RMDs. Beneficiaries are subject to RMDs.
Tax-Free (Qualified) Distributions	Distributions of contributions and earnings to participants from the Roth account are tax free if contributions have been in the Roth elective deferral account for a period of at least five (5) tax years and the participant is at least 59½ years old at the time of the distribution. The five-year period begins with the first taxable year the contribution is included in a participant’s gross income.	N/A	Tax-free distributions are available from a Roth or deemed Roth IRA provided the first contribution made to any Roth or deemed Roth IRA has been held in the IRA for five (5) tax years and the accountholder is at least 59½ years old.
Taxation of Earnings for Non Qualified Distributions	Earnings are taxable when distributed from the plan if the requirements noted in “Tax-Free (Qualified) Distributions” (immediately above) are not met.	N/A	Roth IRA and Deemed Roth IRAs Distribution of earnings prior to age 59½ will be taxable and subject to a 10% early distribution tax. The exceptions to this tax are those that apply to IRAs and non employer retirement plans.
Eligible Rollover Distributions	Permitted to other Roth elective deferral accounts and Roth IRAs.	Required for in-plan conversion.	Roth and Deemed Roth IRAs Can only be rolled over to other Roth IRAs
Distribution Tax Reporting	IRS Form 1099R.	IRS Form 1099R.	Roth and Deemed Roth IRAs Distributions are Reported on IRS Form 1099R. Trustee must provide IRS Forms 5498 annually reflecting account activity and if a RMD will be required in the following year.
Plan Amendment Requirements	By the last day of the plan year in which designated Roth account becomes effective, unless subsequent guidance for 457(b) plans indicates otherwise.	Unless IRS guidance is provided otherwise, same as for designated Roth accounts.	Roth IRA – N/A Deemed Roth IRA By the last day of the plan year in which deemed IRA becomes effective.