Unresolved Issues with Roth Conversion

WARNING

Unresolved issues with Roth Conversion

Use this Amendment advisedly, as it was drafted before any guidance was made available by the Internal Revenue Service.

American Taxpayer Relief Act of 2012 (“ATRA”) effective January 1, 2013.

Act extends Roth conversion right to all participants regardless of age or eligibility for a distribution from the plan.

· Act does not permit taking income tax liability for conversion over more than one year.

· 10% early distribution penalty does not apply. However, recapture rule applies if, within five years, the participant takes a distribution from the Roth account to which penalty would have applied.

· And, always consider that a Roth conversion is irrevocable, unlike a Roth IRA rollover.

A number of issues remain unresolved:

1. Whether distribution restrictions continue to apply to converted amounts.

§ What rules apply to amounts that could be distributed?

§ Do pre-ATRA restrictions continue to apply? ( yes according to JCT Blue Book);

2. What portion of a transfer from elective deferrals is deemed earnings for purposes of a later hardship distribution;

3. Can a plan limit in-plan Roth transfers to particular contribution sources;

4. Whether plans may impose an all-or-nothing requirement with regard to conversion;

5. Can a plan allow employer contributions that are not vested to be transferred;

6. What plan language is required;

7. Can non-spouse beneficiaries make in-plan Roth transfers;

8. Is an in-plan Roth transfer a protected benefit under 411(d)(6);

9. Will a transfer affect lump sum net unrealized appreciation (“NUA”) treatment with respect to employer securities;

10. Is Code section 402(f) Special Tax Notice required;

11. What reporting and recordkeeping is required of the plan upon transfer or subsequent rollover;

12. Does an in-plan Roth rollover or transfer count towards a qualified distribution for the 5-year window;

13. Can a participant do an in-plan Roth transfer to another plan maintained by the employer;

14. Can amounts that have been transferred be removed if required by Code limits? i.e., conversion is done mid-year and it is determined a code limit was violated at the end of the year; and

15. What impact the conversion option will have on various disclosure materials.

In light of the preceding analysis, plan sponsors are advised to delay action to add or implement the expanded in-plan conversion provisions, pending the issuance of further guidance by the IRS.

Many lawyers are recommending their clients wait for further IRS guidance before adopting the provision.

We would like to see the IRS extend the date by which the amendment must be adopted for the 2013 plan year.

IN-PLAN ROTH CONVERSION

AMENDMENT #_____

Section 1. General

1.1. Purpose and Adoption. The following discretionary amendment when properly executed will add an in-plan Roth conversion feature to the Plan.

Pursuant to section 402A(c)(4)(E) the Employer is permitted to amend the Plan to include designated Roth Deferrals and the in-plan Roth conversion feature simultaneously, provided the Plan is actively accepting Elective Deferrals from all eligible participants.

1.2. Precedence. The requirements of this Amendment will take precedence over any inconsistent provisions of the Plan, including any previous amendments adopted by the Employer. Where appropriate, the term “Plan” shall mean the Plan and Trust.

1.3. Requirements of Treasury Regulations Incorporated. This Amendment reflects certain provisions within sections 402A and 408A of the Internal Revenue Code (“Code”) as amended by the Small Business Jobs and Credit Act of 2010 and the American Taxpayer Relief Act of 2012 (ATRA 2012).

1.4. Effective Date. Upon execution of this Amendment, <EMPLOYER NAME> (“the Employer”) amends the Plan to include an in-plan Roth conversion feature effective ___/___/_____, as elected in the Adoption Section of this Amendment.

Section 2. In-Plan Roth Conversion.

2.1 Provisions. Where a plan with a cash or deferred arrangement permits a participant to contribute all or a portion of their Elective Deferrals to the Trust as designated Roth Deferrals (an after-tax deferral); the Employer may amend the Plan to include an in-plan Roth conversion feature. This conversion right shall be permitted regardless of age or eligibility for a distribution from the Plan and may be extended to Accounts that are not Elective Deferrals.

In addition if elected in the Adoption Section, the Employer may amend the Plan to include designated Roth Deferrals.

The Employer’s amendment shall not restrict or eliminate any distribution rights that a participant is entitled to under the Plan (such as a right to an immediate distribution of the amount rolled over or right to an In-Service Distribution existing under the terms of the Plan).

2.2 Conversion. The in-plan Roth conversion shall be made through a Participant election. Under the in-plan Roth conversion feature, all or a portion of a Participant’s Accounts in which he is one hundred percent (100%) vested may be transferred to his Roth Account in this Plan. An In-Plan Roth Conversion Account may be established for this purpose effective on or after January 1, 2013.

Unless otherwise elected in the Adoption Section, any one hundred percent (100%) vested Participant Account may be converted under the in-plan Roth conversion feature.

2.3 Applicable Definitions. For the purpose of this Amendment:

(a) In-plan Roth conversion means the transfer of amounts from a non-designated Roth account without removing the funds from the Plan into an In-Plan Roth Account.

(b) In-Plan Roth Rollover Account means a separate Participant sub-account within the Plan, treated as a designated Roth account under Code section 408A.

2.4 Participant’s Election. Creation of Roth Account.

(a) The Plan shall establish and maintain for the participant an In-Plan Roth Account, upon receipt of an in-plan Roth conversion election. Such an election shall not require the consent of the participant’s spouse.

(b) The value of the Account Balances used in the application of the in-plan Roth conversion election shall be determined as of ______. Once the conversion is made, the participant will be responsible for the taxable value of the distribution. The taxable amount must be included in the participant’s gross income during the year in which the conversion occurs.

ADOPTION SECTION

Effective ___/___/_____ under the terms of this Amendment, the Plan is amended to:

 1. Roth Deferrals - permit designated Roth contributions effective ___/___/_____.

(Complete only if Roth Deferrals were added on or after January 1, 2013)

 2. In-Plan Roth Conversion - permit Participants to elect to convert the following Account(s) listed below:

(Limited to Account Balances in which the Participant is one hundred percent (100%) vested)

 All Accounts

 Elective Deferrals

 Non-Elective Contributions (Profit Sharing)

 ADP Safe Harbor Contributions

 ACP Safe Harbor Contributions

 Matching Contributions

 Qualified Matching Contributions

 Qualified Non-Elective Contributions

 Rollovers

* * * * * * *

STATEMENT OF ADOPTION

The Employer hereby adopts this Amendment on this _____ day of ______, ____.

Employer: / Trustee:
<EMPLOYER NAME>
______/ ______
President / Trustee
______
Trustee

Date:______

This Amendment may only be used with a DATAIR Mass-Submitter Master Prototype or Volume Submitter Defined Contribution Plan.

RESOLUTION OF

THE BOARD OF DIRECTORS

<EMPLOYER NAME>

FOR THE ADOPTION OF A DISCRETIONARY PLAN AMENDMENT

On ___/___/_____, the following resolutions to amend the <EMPLOYER NAME> 401(k) Plan and Trust were duly adopted by a majority of the Board of Directors of <EMPLOYER NAME>, and such resolutions have not been modified or rescinded as of the date hereof:

RESOLVED that the Employer hereby amends the Plan effective ___/___/_____.

RESOLVED, that the attached Amendment reflects the good faith amendment to section 402A and 408A of the Internal Revenue Code.

RESOLVED, that the proper Officers of the Employer shall act as soon as possible to notify their employees of the Employer of the adoption of this Amendment.

RESOLVED, that the proper Officers of the Employer are hereby authorized and directed to execute any and all such documents and to perform such acts as may be necessary and proper to effect the foregoing.

NOW THEREFORE the undersigned does hereby certify that the foregoing is a full, true and correct copy of the Resolutions duly and regularly adopted by the Board of Directors of said Employer.

______

Secretary

______

Date

<EMPLOYER NAME> 401(k) Plan and Trust

SUMMARY OF MATERIAL MODIFICATIONS

To: / Participants of <EMPLOYER NAME> 401(k) Plan and Trust
From: / <EMPLOYER NAME>
Date: / ___/___/_____

This is to inform you of recent changes to the <EMPLOYER NAME> 401(k) Plan and Trust (the Plan).

Effective ___/___/_____ the Plan has been amended to add an in-plan Roth conversion feature. Under this provision, a participant can elect to convert all or a portion of a non-designated Roth account into a designated Roth account within the Plan so long as the Participant’s interest in the Account is one hundred percent (100%) vested.

The Employer will not be responsible for withholding any taxes on the amount rolled over under the in-plan Roth conversion feature. The taxable amount of your in-plan Roth conversion must be included in your gross income and reported by you on your personal tax forms. For the explanation on the tax treatment for a designated Roth account, please review the In-Plan Roth Conversion Special Tax Notice and Options document and 402(f) Special Tax Notice for designated Roth accounts.

Please file this "Summary of Material Modifications" with your Summary Plan Description (the booklet that explains your Plan). If you would like to see the full text of the changes, you may inspect the Plan Document or receive a copy of the changes as explained in the "ERISA Rights" section of your Summary Plan Description.

A participant notice and election form will be distributed upon request. If you have any questions on this Summary or the amendments, contact your Plan Administrator:

In-Plan Roth Conversion Form

Please Print. Complete all applicable areas

Part I. Employee Information:

Name: ______Social Security # X X X-X X -_ _ _ _

Address: ______Date of Birth: _ _ /_ _ /_ _ _ _

City: ______State: ____ ZIP Code: ______

Part II. Roth Conversion: I wish to make an in-plan Roth Conversion of certain of my account(s) listed below: (Select all applicable accounts that are available under the terms of the Plan. Must be 100% vested in account.)

Accounts Conversion Conversion

Percent Amount

□ Elective Deferrals _____% $______

□ Non-Elective Contributions (Profit Sharing) _____% $______

□ ADP Safe Harbor Contributions _____% $______

□ ACP Safe Harbor Contributions _____% $______

□ Matching Contributions _____% $______

□ Qualified Matching Contributions _____% $______

□ Qualified Non-Elective Contributions _____% $______

□ Qualified Matching Contributions _____% $______

□ Rollovers _____% $______

Please review the Summary of Modifications (SMM) attached to this document.

I hereby request that a portion of the Accounts selected above be transferred to a designated Roth account within the Plan.

______

Participant’s Signature