| Treasury Decision 9237 |
February 6, 2006 |
Designated Roth Contributions to Cash or
Deferred Arrangements Under Section 401(k)
Internal Revenue Service (IRS), Treasury.
This document contains amendments to the regulations under sections
401(k) and (m) of the Internal Revenue Code. These regulations provide guidance
concerning the requirements for designated Roth contributions under qualified
cash or deferred arrangements described in section 401(k). These regulations
affect section 401(k) plans that provide for designated Roth contributions
and participants eligible to make elective contributions under these plans.
Effective Date: These regulations are effective
January 1, 2006.
Applicability Date: These regulations apply to
plan years beginning on or after January 1, 2006.
FOR FURTHER INFORMATION CONTACT:
Cathy A. Vohs, 202-622-6090 or R. Lisa Mojiri-Azad, 202-622-6060 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
The collection of information contained in these final regulations has
been reviewed and approved by the Office of Management and Budget in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control
number 1545-1930.
The collection of information in these regulations is in 26 CFR §1.401(k)-1(f)(1)&(2).
This information is required to comply with the separate accounting and recordkeeping
requirements of section 402A.
The estimated annual burden per respondent under control number 1545-1930
is 1 hour.
Comments concerning the accuracy of this burden estimate and suggestions
for reducing this burden should be sent to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, SE:CAR:MP:T:T:SP, Washington, DC 20224, and
to the Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs, Washington,
DC 20503.
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid control
number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be retained
as long as their contents might become material in the administration of any
internal revenue law. Generally, tax returns and tax return information are
confidential, as required by 26 U.S.C. 6103.
This document contains amendments to the Income Tax Regulations (26
CFR Part 1) under section 401(k) and (m) of the Internal Revenue Code of 1986
(Code). The amendments provide guidance on designated Roth contributions
under section 402A of the Code, added by section 617(a) of the Economic Growth
and Tax Relief Reconciliation Act of 2001 (Public Law 107-16, 115 Stat. 38)
(EGTRRA).
Section 401(k) provides that a profit-sharing, stock bonus, pre-ERISA
money purchase or rural cooperative plan will not fail to qualify under section
401(a) merely because it contains a qualified cash or deferred arrangement.
Contributions made at the election of an employee under a qualified cash
or deferred arrangement are known as elective contributions. Generally, such
elective contributions are not includible in gross income at the time contributed
and are sometimes referred to as pre-tax elective contributions.
Under section 402A, effective for tax years beginning on or after January
1, 2006, a plan may permit an employee who makes elective contributions under
a qualified cash or deferred arrangement to designate some or all of those
contributions as designated Roth contributions. Designated Roth contributions
are elective contributions under a qualified cash or deferred arrangement
that, unlike pre-tax elective contributions, are currently includible in gross
income. However, a qualified distribution of designated Roth contributions
is excludable from gross income.
Although designated Roth contributions under a qualified cash or deferred
arrangement bear some similarity to contributions to a Roth IRA described
in section 408A (e.g., contributions to either type of
account are after-tax contributions and qualified distributions from either
type of account are excludable from gross income), there are many differences
between these types of arrangements. For example, under section 408A(c)(3),
an individual is ineligible to make Roth IRA contributions if his or her modified
adjusted gross income exceeds certain limits, but section 402A does not impose
any comparable income limits on an individual’s eligibility to make
designated Roth contributions under a qualified cash or deferred arrangement.
In addition, under section 408A(d)(3), a traditional IRA may be converted
to a Roth IRA, but section 402A does not provide for a conversion of a pre-tax
elective contribution account under a qualified cash or deferred arrangement
to a designated Roth account. Also, under section 408A(d)(4), specific ordering
rules apply to distributions from Roth IRAs. Section 402A, however, does
not provide a specific ordering rule for distributions from designated Roth
accounts, so section 72 applies to determine the character of distributions
from such accounts.
On December 29, 2004, final regulations (T.D. 9169, 2005-5 I.R.B. 381)
under section 401(k) were issued (69 FR 78144). Those regulations generally
apply to plan years beginning on or after January 1, 2006, although they also
may be applied to plan years ending after December 29, 2004. Under those final
regulations, §1.401(k)-1(f) was reserved for special rules for designated
Roth contributions. On March 2, 2005, proposed regulations (REG-152354-04,
2005-13 I.R.B. 805) to fill in that reserved paragraph and provide additional
rules applicable to designated Roth contributions were issued (70 FR 10062).
Written public comments were received on the proposed regulations and public
reaction to the proposed regulations generally was favorable. After consideration
of the comments, these final regulations adopt the provisions of the proposed
regulations with certain modifications, the most significant of which are
highlighted below.
Explanation of Provisions
Rules Relating to Designated Roth Contributions
These final regulations retain the special rules which were included
in the proposed regulations relating to designated Roth contributions under
a section 401(k) plan. Thus, these final regulations amend §1.401(k)-1(f)
to provide a definition of designated Roth contributions and special rules
with respect to such contributions. Under these final regulations, designated
Roth contributions are defined as elective contributions under a qualified
cash or deferred arrangement that are: (1) designated irrevocably by the
employee at the time of the cash or deferred election as designated Roth contributions
that are being made in lieu of all or a portion of the pre-tax elective contributions
the employee is otherwise eligible to make under the plan; (2) treated by
the employer as includible in the employee’s gross income at the time
the employee would have received the contribution amounts in cash if the employee
had not made the cash or deferred election (e.g., by
treating the contributions as wages subject to applicable withholding requirements);
and (3) maintained by the plan in a separate account. The regulations also
provide that elective contributions may only be treated as designated Roth
contributions to the extent permitted under the plan.
Some commentators requested that an employer sponsoring a qualified
cash or deferred arrangement be permitted to offer only designated Roth contributions.
However, under section 402A(b)(1), designated Roth contributions are made
in lieu of all or a portion of elective contributions that the employee is
otherwise eligible to make under the cash or deferred arrangement. If a cash
or deferred arrangement offered only designated Roth contributions, an employee
participating in the arrangement would not be electing to make such contributions
in lieu of elective contributions he or she was otherwise eligible to make
under the plan. Thus, these final regulations clarify that, in order to provide
for designated Roth contributions, a qualified cash or deferred arrangement
must also offer pre-tax elective contributions.
Separate Accounting Requirement
These final regulations also retain the rule that, under the separate
accounting requirement, contributions and withdrawals of designated Roth contributions
must be credited and debited to a designated Roth account maintained for the
employee and the plan must maintain a record of the employee’s investment
in the contract (i.e., designated Roth contributions
that have not been distributed) with respect to the employee’s designated
Roth account. In addition, gains, losses, and other credits or charges must
be separately allocated on a reasonable and consistent basis to the designated
Roth account and other accounts under the plan. The proposed regulations
provided that forfeitures may not be allocated to the designated Roth account.
The final regulations retain this rule and, in response to comments, clarify
that no contributions other than designated Roth contributions and rollover
contributions described in section 402A(c)(3)(B) are permitted to be allocated
to a designated Roth account. For example, matching contributions are not
permitted to be allocated to a designated Roth account. The final regulations
also retain the rule that the separate accounting requirement applies at the
time the designated Roth contribution is contributed to the plan and must
continue to apply until the designated Roth account is completely distributed.
These final regulations retain the requirement that a designated Roth
contribution must satisfy the requirements applicable to any other elective
contributions made under a qualified cash or deferred arrangement. Thus,
designated Roth contributions are subject to the nonforfeitability and distribution
restrictions applicable to elective contributions and are taken into account
under the actual deferral percentage test (ADP test) of section 401(k)(3)
in the same manner as pre-tax elective contributions. Similarly, designated
Roth contributions may be treated as catch-up contributions and serve as the
basis for a participant loan.
A number of commentators discussed the application of section 401(a)(9)
to plans to which designated Roth contributions are made. These commentators
pointed out that under section 408A, Roth IRAs are not subject to the rules
of section 401(a)(9)(A) (i.e., Roth IRAs are not subject
to the rules of section 401(a)(9) while the Roth IRA owner is alive). Although
Roth IRAs are not subject to section 401(a)(9) while the IRA owner is alive,
section 402A does not provide comparable rules regarding the application of
section 401(a)(9) to designated Roth accounts under a cash or deferred arrangement.
Thus, such designated Roth accounts are subject to the rules of section 401(a)(9)(A)
and (B) in the same manner as pre-tax elective contributions.
In response to comments asking for clarification, the final regulations
provide rules regarding elections to make designated Roth contributions.
These rules specifically provide that the rules in §1.401(k)-1(e)(2)(ii)
regarding frequency of elections to make pre-tax elective contributions also
apply to elections to make designated Roth contributions. The rules also
specifically address automatic enrollment and permit a plan to utilize automatic
enrollment in conjunction with designated Roth contributions. Under the final
regulations, a plan that provides for a cash or deferred election under which
contributions are made in the absence of an affirmative election and that
has both pre-tax elective contributions and designated Roth contributions
must set forth the extent to which those default contributions are pre-tax
elective contributions or designated Roth contributions. If the default contributions
are designated Roth contributions, then an employee who has not made an affirmative
election is deemed to have irrevocably designated the contributions (in accordance
with section 402A(c)(1)(B)) as designated Roth contributions.
A number of commentators addressed direct rollovers of amounts from
a designated Roth account. In response to these comments, the regulations
clarify that a direct rollover from a designated Roth account under a qualified
cash or deferred arrangement may only be made to another designated Roth account
under an applicable retirement plan described in section 402A(e)(1) or to
a Roth IRA described in section 408A, and only to the extent the direct rollover
is permitted under the rules of section 402(c). In addition, a plan is permitted
to treat the balance of the participant’s designated Roth account and
the participant’s other accounts under the plan as accounts held under
two separate plans (within the meaning of section 414(l)) for purposes of
applying the special rule in A-11 of §1.401(a)(31)-1 (under which a plan
will satisfy section 401(a)(31) even though the plan administrator does not
permit any distributee to elect a direct rollover with respect to eligible
rollover distributions during a year that are reasonably expected to total
less than $200). Thus, if a participant’s balance in the designated
Roth account is less than $200, then the plan is not required to offer a direct
rollover election with respect to that account or to apply the automatic rollover
provisions of section 401(a)(31)(B) with respect to that account.
Section 1.401(k)-2 contains correction methods that may be used when
a plan fails to satisfy the ADP test for a year. These final regulations
retain the rule in the proposed regulations relating to these correction methods
that permits a highly compensated employee (HCE), as defined in section 414(q),
with elective contributions for a year that include both pre-tax elective
contributions and designated Roth contributions to elect whether excess contributions
are to be attributed to pre-tax elective contributions or designated Roth
contributions. There is no requirement that the plan provide this option,
and a plan may provide for one of the correction methods described in the
final regulations without permitting an HCE to make such an election.
These final regulations also retain the rule that a distribution of
excess contributions is not includible in gross income to the extent it represents
a distribution of designated Roth contributions. However, the income allocable
to a corrective distribution of excess contributions that are designated Roth
contributions is includible in gross income in the same manner as income allocable
to a corrective distribution of excess contributions that are pre-tax elective
contributions. The regulations also provide a similar rule under the correction
methods that may be used when a plan fails to satisfy the actual contribution
percentage (ACP) test in §1.401(m)-2.
In addition to the rules relating to sections 401(k) and (m) discussed
above, there are other aspects of designated Roth contributions that would
be reflected in plan terms and are not addressed in these regulations. For
example, while a plan is permitted to allow an employee to elect the character
of a distribution (i.e., whether the distribution will
be made from the designated Roth account or other accounts), the extent to
which a plan so permits must be set forth in the terms of the plan.
Certain Issues Addressed in Proposed Regulations
These final regulations do not provide guidance with respect to the
taxation of distributions of designated Roth contributions. For example,
the regulations do not provide guidance with respect to the recovery of an
employee’s investment in the contract associated with his or her designated
Roth contributions. Proposed regulations under section 402A, to be issued
in the near future, address these taxation issues.
Section 402A is effective for an employee’s taxable years beginning
after December 31, 2005. These regulations have the same effective date as
the regulations under section 401(k) that they are amending. Thus, these
final regulations are generally applicable to plan years beginning on or after
January 1, 2006. If a plan is applying the section 401(k) regulations as
of an earlier effective date (as provided under those regulations), to the
extent that section 402A is effective, that same early effective date applies
to these regulations. For a plan that has an effective date for the section
401(k) regulations that is after the effective date of section 402A (either
an employer that does not have a calendar year plan or a plan established
pursuant to a collective bargaining agreement that has a delayed effective
date for the section 401(k) regulations), the employer may rely on these regulations
prior to the effective date of the final section 401(k) regulations for the
plan, even if the plan does not otherwise implement the section 401(k) regulations
earlier than required.
These regulations do not provide rules for the application of the EGTRRA
sunset provision (section 901 of EGTRRA), under which the provisions of EGTRRA
do not apply to taxable, plan, or limitation years beginning after December
31, 2010. Unless the EGTRRA sunset provision is repealed before it becomes
effective, additional guidance will be needed to clarify its application.
It has been determined that these regulations are not a significant
regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It has also been determined that 5 U.S.C. 553(b)
does not apply to these regulations. It is hereby certified that the collection
of information in these regulations will not have a significant economic impact
on a substantial number of small entities. This certification is based on
the fact that most small entities that maintain a section 401(k) plan use
a third party provider to administer the plan. Therefore, an analysis under
the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant
to section 7805(f) of the Code, the proposed regulations preceding these
regulations were submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401(k)-0 is amended as follows:
1. The entry for §1.401(k)-1(f) is revised and entries for §1.401(k)-1(f)(1),
(2), (3), (4) and (5) are added.
2. An entry for §1.401(k)-2(b)(2)(vi)(C) is added.
The additions read as follows:
§1.401(k)-0 Table of contents.
* * * * *
§1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
(f) Special rules for designated Roth contributions.
(1) In general.
(2) Separate accounting required.
(3) Designated Roth contributions must satisfy rules applicable to
elective contributions.
(i) In general.
(ii) Special rules for direct rollovers.
(4) Rules regarding designated Roth contribution elections.
(i) Frequency of elections.
(ii) Default elections.
(5) Effective date.
(i) In general.
(ii) Sunset provisions.
* * * * *
* * * * *
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth contributions.
* * * * *
Par. 3. Section 1.401(k)-1(f) is revised as follows:
§1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
(f) Special rules for designated Roth contributions—(1)
In general. The term designated Roth contribution means
an elective contribution under a qualified cash or deferred arrangement that,
to the extent permitted under the plan, is—
(i) Designated irrevocably by the employee at the time of the cash or
deferred election as a designated Roth contribution that is being made in
lieu of all or a portion of the pre-tax elective contributions the employee
is otherwise eligible to make under the plan;
(ii) Treated by the employer as includible in the employee’s gross
income at the time the employee would have received the amount in cash if
the employee had not made the cash or deferred election (e.g.,
by treating the contributions as wages subject to applicable withholding requirements);
and
(iii) Maintained by the plan in a separate account (in accordance with
paragraph (f)(2) of this section).
(2) Separate accounting required. Under the separate
accounting requirement of this paragraph (f)(2), contributions and withdrawals
of designated Roth contributions must be credited and debited to a designated
Roth account maintained for the employee and the plan must maintain a record
of the employee’s investment in the contract (i.e.,
designated Roth contributions that have not been distributed) with respect
to the employee’s designated Roth account. In addition, gains, losses,
and other credits or charges must be separately allocated on a reasonable
and consistent basis to the designated Roth account and other accounts under
the plan. However, forfeitures may not be allocated to the designated Roth
account and no contributions other than designated Roth contributions and
rollover contributions described in section 402A(c)(3)(B) may be allocated
to such account. The separate accounting requirement applies at the time
the designated Roth contribution is contributed to the plan and must continue
to apply until the designated Roth account is completely distributed.
(3) Designated Roth contributions must satisfy rules applicable
to elective contributions—(i) In general.
A designated Roth contribution must satisfy the requirements applicable to
elective contributions made under a qualified cash or deferred arrangement.
Thus, for example, a designated Roth contribution must satisfy the requirements
of paragraphs (c) and (d) of this section and is treated as an employer contribution
for purposes of sections 401(a), 401(k), 402, 404, 409, 411, 412, 415, 416
and 417. In addition, the designated Roth contributions are treated as elective
contributions for purposes of the ADP test. Similarly, the designated Roth
account under the plan is subject to the rules of section 401(a)(9)(A) and
(B) in the same manner as an account that contains pre-tax elective contributions.
(ii) Special rules for direct rollovers. A direct
rollover from a designated Roth account under a qualified cash or deferred
arrangement may only be made to another designated Roth account under an applicable
retirement plan described in section 402A(e)(1) or to a Roth IRA described
in section 408A, and only to the extent the rollover is permitted under the
rules of section 402(c). Moreover, a plan is permitted to treat the balance
of the participant’s designated Roth account and the participant’s
other accounts under the plan as accounts held under two separate plans (within
the meaning of section 414(l)) for purposes of applying the special rule in
A-11 of §1.401(a)(31)-1 (under which a plan will satisfy section 401(a)(31)
even though the plan administrator does not permit any distributee to elect
a direct rollover with respect to eligible rollover distributions during a
year that are reasonably expected to total less than $200).
(4) Rules regarding designated Roth contribution elections—(i)
Frequency of elections. The rules under paragraph (e)(2)(ii)
of this section regarding frequency of elections apply in the same manner
to both pre-tax elective contributions and designated Roth contributions.
Thus, an employee must have an effective opportunity to make (or change)
an election to make designated Roth contributions at least once during each
plan year.
(ii) Default elections—(A) In the case
of a plan that provides for both pre-tax elective contributions and designated
Roth contributions and in which, under paragraph (a)(3)(ii) of this section,
the default in the absence of an affirmative election is to make a contribution
under the cash or deferred arrangement, the plan terms must provide the extent
to which the default contributions are pre-tax elective contributions and
the extent to which the default contributions are designated Roth contributions.
(B) If the default contributions under the plan are designated Roth
contributions, then an employee who has not made an affirmative election is
deemed to have irrevocably designated the contributions (in accordance with
section 402A(c)(1)(B)) as designated Roth contributions.
(5) Effective date—(i) In general.
Section 402A is effective for taxable years beginning after December 31,
2005.
(ii) Sunset provisions. The rules set forth in
this paragraph (f) do not address the application of section 901 of the Economic
Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16; 115 Stat.
38) (under which the amendments made by that Act do not apply to taxable,
plan, or limitation years beginning after December 31, 2010).
* * * * *
Par. 4. Section 1.401(k)-2 is amended as follows:
1. A new sentence is added after the second sentence in paragraph (b)(1)(ii).
2. The last sentence in paragraph (b)(2)(vi)(B) is amended by adding
the phrase “, except to the extent provided in paragraph (b)(2)(vi)(C)
of this section.”
3. Paragraph (b)(2)(vi)(C) is added.
The additions read as follows:
* * * * *
(b) * * *
(1) * * *
(ii) * * * Similarly, a plan may permit an HCE with elective contributions
for a year that includes both pre-tax elective contributions and designated
Roth contributions to elect whether the excess contributions are to be attributed
to pre-tax elective contributions or designated Roth contributions. * * *
* * * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth
contributions. Notwithstanding paragraphs (b)(2)(vi)(A) and (B)
of this section, a distribution of excess contributions is not includible
in gross income to the extent it represents a distribution of designated Roth
contributions. However, the income allocable to a corrective distribution
of excess contributions that are designated Roth contributions is included
in gross income in accordance with paragraph (b)(2)(vi)(A) or (B) of this
section (i.e., in the same manner as income allocable
to a corrective distribution of excess contributions that are pre-tax elective
contributions).
* * * * *
Par. 5. Section 1.401(k)-6 is amended as follows:
1. The definitions of “Designated Roth account” and “Designated
Roth contributions” are added after the definition of Current
year testing method.
2. A new definition of “Pre-tax elective contributions”
is added after the definition of Pre-ERISA money purchase pension
plan.
The additions read as follows:
* * * * *
Designated Roth account. Designated
Roth account means a separate account maintained by a plan to which
only designated Roth contributions (including income, expenses, gains and
losses attributable thereto) are made.
Designated Roth contributions. Designated
Roth contributions means designated Roth contributions as defined
in §1.401(k)-1(f)(1).
* * * * *
Pre-tax elective contributions. Pre-tax
elective contributions means elective contributions under a qualified
cash or deferred arrangement that are not designated Roth contributions.
* * * * *
Par. 6. Section 1.401(m)-0 is amended by adding an entry for §1.401(m)-2(b)(2)(vi)(C)
to read as follows:
§1.401(m)-0 Table of contents.
* * * * *
* * * * *
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth contributions.
* * * * *
Par. 7. Section 1.401(m)-2 is amended as follows:
1. The last sentence in paragraph (b)(2)(vi)(B) is amended by adding
the phrase “, or as provided in paragraph (b)(2)(vi)(C) of this section.”
2. Paragraph (b)(2)(vi)(C) is added.
The additions read as follows:
* * * * *
(b) * * *
(2) * * *
(vi) * * *
(C) Corrective distributions attributable to designated Roth
contributions. Notwithstanding paragraphs (b)(2)(vi)(A) and (B)
of this section, a distribution of excess aggregate contributions is not includible
in gross income to the extent it represents a distribution of designated Roth
contributions. However, the income allocable to a corrective distribution
of excess aggregate contributions that are designated Roth contributions is
taxed in accordance with paragraph (b)(2)(vi)(A) or (B) of this section (i.e.,
in the same manner as income allocable to a corrective distribution of excess
aggregate contributions that are not designated Roth contributions).
* * * * *
Par. 8. Section 1.401(m)-5 is amended by adding a new definition of
“Designated Roth contributions” after the definition of Current
year testing method to read as follows:
* * * * *
Designated Roth contributions. Designated
Roth contributions means designated Roth contributions as defined
in §1.401(k)-1(f)(1).
* * * * *
PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 9. The authority citation for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In §602.101, paragraph (b) is amended by adding an entry
for “1.401(k)-1” in numerical order to the table to read, in part,
as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
Mark E. Matthews,
Deputy
Commissioner for
Services and Enforcement.
Approved December 13, 2005.
Eric Solomon,
Acting
Deputy Assistant
Secretary for Tax Policy.
Note
(Filed by the Office of the Federal Register on December 30, 2005, 8:45
a.m., and published in the issue of the Federal Register for January 3, 2006,
71 F.R. 6)
The principal authors of these regulations are R. Lisa Mojiri-Azad and
Cathy A. Vohs of the Office of the Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). However, other personnel from the IRS
and Treasury participated in the development of these regulations.
* * * * *
Internal Revenue Bulletin 2006-06
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