PA Pension Planners


Roth 401(k)

EGTRRA added section 402A to the Internal Revenue Code, which provides that a participant who is making elective deferrals to a 401(k) plan, may designate all or some of those contributions as “Roth” contributions. Roth contributions are included in the participant’s income in the year they are made. When distributed the Roth contribution plus the interest earned on it are excluded from the participant’s income.  Section 402A is effective for taxable years beginning after December 31, 2005. These regulations are proposed to apply to plan years beginning on or after January 1, 2006.  Plans adding Roth 401(k) provisions will need to be amended on or before the last day of the Plan Year beginning on or after January 1, 2006.

The regulations define Roth contributions as elective contributions under qualified cash or deferred arrangement and that meet the following criteria:

  1. The participant makes an irrevocable designation to treat some or all of the elective deferrals as Roth contributions.
  2. The employer must treat the Roth contributions as income to the participant at the time the participant would have received those amounts, if they were not contributed to the plan.
  3. Roth contributions must be maintained in a separate account under the plan for all contributions, distributions, gains/losses, the participant’s investment in the contract, and any other credits or charges must be separately allocated to this account. Forfeitures may not be allocated to the designated Roth contribution account.

Additional Rules

A Roth 401(k) contribution must be treated like an elective deferral is treated under a 401(k) plan; therefore it must satisfy all the same requirements as an elective deferral, such as ADP/ACP testing, distribution restrictions, minimum distribution rules and nonforfeitability.

“Qualified Distributions” of Roth 401(k) contributions plus earnings are tax fee. A qualified distribution is one that is made after the end of the applicable 5-tax- year period and after age 59 ½, at disability or to a beneficiary after the death of the participant. The 5-tax-year period begins with the first year the participant makes a designated Roth contribution to the plan. If the participant has a rollover of designated Roth contributions from another plan, the 5-tax-year period begins in the year the first designated Roth contribution was made to that plan, if it is an earlier year than the year the first designated Roth contribution was made to the current plan.

Additional Required Plan Terms

In addition to amending the plan to permit participants to designate 401(k) contributions as Roth contributions other provisions related to Roth contributions must be reflected in the plan document. For example, the plan language must include direction on issues such as a) to what extent the plan will permit participants to designate whether a distribution will be made from Roth contributions or from other accounts, b) that Roth contributions may only be rolled over to another plan that maintains a designated Roth contribution account or to a designated Roth IRA and (c) whether participants will be given the right to choose between distributions of excess contributions from regular or Roth 401(k) contributions.