January 16, 2013
The U.S. fiscal cliff deal, or the American Taxpayer Relief Act of 2012 (the "Act"), signed into law by President Obama last week, permits employers to amend their 401(k), 403(b) or governmental 457(b) plans to allow a larger group of participants to move their pre-tax plan account balances into Roth accounts.
Under previous law, a plan participant could convert funds held in a pre-tax account into a Roth account if the participant was otherwise eligible for an eligible rollover distribution and the terms of the plan otherwise allowed the conversion. This generally meant that the participant must have attained age 59½ before he or she could take advantage of the Roth in-plan conversion rules.
Under Internal Revenue Code Section 402A(c)(4), as amended by the Act, a Roth conversion of vested funds is now permitted regardless of whether the plan participant has attained age 59½ or is otherwise eligible for a plan distribution.
The effect of this new law is that a much larger group of plan participants will be permitted to elect to pay tax currently on amounts held in their pre-tax accounts and transfer these amounts to Roth plan accounts. The later distribution of the funds (including any investment gains) from the plan would generally be tax free if the Internal Revenue Code’s Roth qualified distribution rules are otherwise met. A Roth in-plan conversion election is irrevocable.
This voluntary expanded Roth conversion option is effective immediately for transfers after December 31, 2012. However, employers must amend their plans if they would like to offer this option.
Stephen W. Fackler – Palo Alto and New York (650-849-5385 and 212-351-2392, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
David I. Schiller – Dallas (214-698-3205, [email protected])
Sean Feller – Los Angeles (213-229-7579, [email protected])
Krista Hanvey – Dallas (214-698-3425, [email protected])
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