In-Plan Roth Conversions

12/10/2010 / Mary L. Komornicka

The Small Business Jobs Act of 2010 added a provision that 401(k) plans that have a Roth deferral option can permit in-plan conversions of non-Roth funds to the Roth account. The IRS has issued guidance on the procedures that plans should use if the plan sponsor elects to add this feature. (Notice 2010-84). 
In general, this provision will allow a participant to convert funds that are currently distributable into a Roth account within the plan in 2010. The taxes due on the converted amounts can be paid with regular income taxes for 2010 or deferred into 2011 and 2012 tax years. There is no mandatory income tax withholding requirement on these funds. 
Retirement plan sponsors who wish to provide this option will need to amend their plans by December 31, 2011. However, given that this in-plan Roth rollover must happen by December 31, 2010, plan sponsors are advised to promptly confer with their Larkin Hoffman legal counsel regarding the appropriateness of this provision for their plan.