[Federal Register: January 26, 2006 (Volume 71, Number 17)]
[Proposed Rules]
[Page 4320-4331]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja06-20]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-146459-05]
RIN 1545-BF04
Designated Roth Accounts Under Section 402A
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations under sections
402(g), 402A, 403(b), and 408A of the Internal Revenue Code (Code)
relating to designated Roth accounts. These regulations will affect
administrators of, employers maintaining, participants in, and
beneficiaries of section 401(k) and section 403(b) plans, as well as
owners and beneficiaries of Roth IRAs and trustees of Roth IRAs.
DATES: Written or electronic comments and requests for a public hearing
must be received by April 26, 2006.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-146459-05), room
5203, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
146459-05), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically directly to the IRS Internet site at http://www.irs.gov/regs, or via the Federal eRulemaking Portal at http://
http://www.regulations.gov (IRS-REG-146459-05).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, R. Lisa
Mojiri-Azad, 202-622-6060 or Cathy A. Vohs, 202-622-6090; Concerning
the submission of comments or to request a public hearing, Richard
Hurst at Richard.A.Hurst@irscounsel.treas.gov or (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent 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, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP;
Washington, DC 20224. Comments on the collection of information should
be received by March 27, 2006. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in this proposed regulation is in 26
CFR 1.402A-2. This information is required to comply with the separate
accounting and recordkeeping requirements of section 402A. This
information will be used by the IRS and employers maintaining
designated Roth accounts to insure compliance with the requirements of
section 402A. The collection of information is required to obtain a
benefit. The likely recordkeepers are state or local governments,
business or other for-profit institutions, nonprofit institutions, and
small businesses or organizations.
Estimated total annual recordkeeping burden: 828,000 hours.
Estimated average annual burden hours per recordkeeper: 2.3 hours.
Estimated number of recordkeepers: 357,000.
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 may 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.
Background
This document contains proposed regulations under sections 402(g),
402A, 403(b), and 408A of the Internal Revenue Code. Section 402A,
which sets forth rules for designated Roth contributions, was added to
the Code by section 617(a) of the Economic Growth and Tax Relief
Reconciliation Act of 2001, Public Law 107-16 (115 Stat. 103) (EGTRRA),
effective for taxable years beginning after December 31, 2005.
Section 401(k) sets forth rules for qualified cash or deferred
arrangements under which an employee may make an election between cash
and an employer contribution to a plan qualified under section 401(a)
and section 403(b) permits a similar salary reduction agreement under
which payments are made to a section 403(b) plan. Section 402(e)(3)
provides that an amount is not includible in an employee's income
merely because the employee has an election whether these contributions
will be made to the trust or annuity or received by the employee in
cash.
Amounts contributed pursuant to these qualified cash or deferred
arrangements and salary reduction agreements are defined in section
402(g)(3) as elective deferrals and section 402(g)(1) provides a limit
on the amount of elective deferrals that may be excluded from an
employee's income for a taxable year. Section 402(g)(2)
[[Page 4321]]
provides for the distribution of elective deferrals that exceed the
annual limit on elective deferrals (an excess deferral).
A designated Roth contribution is an elective deferral, as
described in section 402(g)(3)(A) or (C), to a section 401(k) or 403(b)
plan that has been designated by an employee, pursuant to section 402A,
as not excludable from the employee's gross income. Under section
402A(b)(2), designated Roth contributions must be maintained by the
plan in a separate account (a designated Roth account).
Under section 402(a), a distribution from a plan qualified under
section 401(a) is taxable under section 72 to the distributee in the
taxable year distributed. However, pursuant to section 402A(d)(1), a
qualified distribution from a designated Roth account is excludable
from gross income. A qualified distribution is defined in section
402A(d)(2) as a distribution that is made after completion of a
specified 5-year period and the satisfaction of other specified
requirements.
If the distribution is not a qualified distribution, pursuant to
section 72, the distribution is included in the distributee's gross
income to the extent allocable to income on the contract and excluded
from gross income to the extent allocable to investment in the contract
(basis). The amount of a distribution allocated to investment in the
contract is determined by applying to the distribution the ratio of the
investment in the contract to the account balance.
Section 402(c) provides rules under which certain distributions
from a plan qualified under section 401(a) may be rolled over into
another eligible retirement plan. In such a case, the distribution is
not currently includible in the distributee's gross income. Under
section 402(c)(2), to the extent some or all of the distribution from a
plan qualified under section 401(a) would not have been includible in
gross income if it were not rolled over, that portion of the
distribution can only be rolled over into an individual retirement
plan, or through a direct rollover to another plan qualified under
section 401(a) which agrees to separately account for such rolled over
amounts. Section 403(b)(8)(B) provides that the rules of section
402(c)(2) also apply for purposes of the rollover rules under section
403(b)(8).
Under section 402(c)(8) and 402A(c)(3), a distribution from a
designated Roth account can be rolled over only to another designated
Roth account or to a Roth IRA. Under section 408A, a Roth IRA is a type
of individual retirement plan (IRA) under which contributions to the
account are never deductible and qualified distributions from the
account are excludable from gross income. Section 408A(d)(4) sets forth
special ordering rules for the return of basis in the case of a
distribution from a Roth IRA. Under these ordering rules, in the case
of nonqualified distribution from the account, basis is recovered
before income is taxed.
Section 617(d) of EGTRRA amended section 6051(a)(8) to require the
reporting of designated Roth contributions on Form W-2, ``Wage and Tax
Statement'' and added a new subsection (f) to section 6047 to require
plan administrators or other responsible persons of section 401(k) or
403(b) plans to make such returns and reports regarding designated Roth
contributions to the Secretary of the Treasury and such other persons
the Secretary may prescribe.
Final regulations under section 401(k) were issued on December 29,
2004 (69 FR 78144). Those final regulations reserved Sec. 1.401(k)-
1(f) for special rules for designated Roth contributions. On March 2,
2005, proposed regulations to fill in that reserved paragraph and
provide additional rules applicable to designated Roth contributions
were issued (70 FR 10062). Final regulations adopting those proposed
regulations, with certain modifications, were issued on January 3, 2006
(71 FR 6). The provisions of the final section 401(k) regulations
regarding designated Roth contributions do not address the taxability
of distributions from designated Roth accounts or the reporting
requirements that apply to contributions of designated Roth
contributions or distributions from the accounts.\1\
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\1\ The preamble to the proposed regulations under section
401(k) regarding designated Roth contributions, which were issued on
March 2, 2005, requested comments on the issues for which guidance
is needed with respect to the taxation of distributions from
designated Roth accounts and any other issues under section 402A on
which guidance is needed. A number of comments were received in
response to that solicitation and those comments have been taken
into account in developing these proposed regulations.
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These proposed regulations under section 402A are intended to
provide comprehensive guidance on the taxation of distributions from
designated Roth accounts under section 401(k) and section 403(b) plans.
The proposed regulations also provide guidance on the reporting
requirements with respect to these accounts. In addition, these
proposed regulations provide guidance with respect to designated Roth
contributions under section 403(b) plans by amending the proposed
section 403(b) regulations issued in 2004 (2004 proposed section 403(b)
regulations), which were published in the Federal Register on November
16, 2004 (69 FR 67075), to reflect the provisions of section 402A.
Finally, these proposed regulations include amendments to the
regulations under section 402(g) issued in 1991 in order to reflect the
enactment of section 402A (as well as other statutory changes since
those regulations were issued) and to make changes to conform the
regulations under section 402(g) to the final section 401(k)
regulations. These proposed regulations also add a new Sec. 1.408A-10
to the existing regulations under section 408A for Roth IRAs (Sec.
1.408A-1 through 9) issued in 1999 to reflect the interaction between
section 408A and section 402A.
Explanation of Provisions
Overview
These proposed regulations provide guidance on the taxation of
distributions from designated Roth accounts and other related issues. A
designated Roth account is a separate account under a section 401(k)
plan or section 403(b) plan to which designated Roth contributions are
made, and for which separate accounting of contributions, gains, and
losses are maintained. These proposed regulations clarify that any
transaction or accounting methodology involving an employee's
designated Roth account and any other accounts under the plan or plans
of an employer that has the effect of directly or indirectly
transferring value from another account into the designated Roth
account violates the separate accounting requirement under section
402A.
The taxation of a distribution from a designated Roth account
depends on whether or not the distribution is a qualified distribution.
A qualified distribution from a designated Roth account is not
includible in the employee's gross income. A qualified distribution is
generally a distribution that is made after a 5-taxable-year period of
participation and that either (1) is made on or after the date the
employee attains age 59\1/2\, (2) is made after the employee's death,
or (3) is attributable to the employee's being disabled within the
meaning of section 72(m)(7).
Determination of 5-Year Rule for Qualified Distributions
In order for a distribution from a designated Roth account to be a
qualified distribution and thus not includible in gross income, a 5-
taxable-
[[Page 4322]]
year requirement must be satisfied. These proposed regulations would
reflect the rule in section 402A that the 5-taxable-year period during
which a distribution is not a qualified distribution begins on the
first day of the employee's taxable year for which the employee first
had designated Roth contributions made to the plan and ends when 5
consecutive taxable years have been completed. However, if a direct
rollover is made from a designated Roth account under another plan, the
5-taxable-year period for the recipient plan begins on the first day of
the employee's taxable year for which the employee first had designated
Roth contributions made to the other plan, if earlier.
Taxation of Nonqualified Distributions
Some commentators requested that the special ordering rules in
section 408A(d), providing that the first distributions from a Roth IRA
are a return of contributions (and thus not includible in gross income)
until all contributions have been returned as basis, be applied to
distributions from a designated Roth account. Although designated Roth
contributions to a designated Roth account bear some similarity to
contributions to a Roth IRA (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.
Section 402A does not provide that the special ordering rules of
section 408A(d) apply to distributions from designated Roth accounts
and, thus, these proposed regulations do not apply those special
ordering rules. The only special rule under section 402A for
nonqualified distributions from a designated Roth account is that the
account is treated as a separate contract for purposes of section 72.
Thus, these proposed regulations provide that a distribution from a
designated Roth account that is not a qualified distribution is taxable
to the distributee under section 402 (or section 403(b)(1)), treating
the designated Roth account as a separate contract under section 72. In
applying that treatment, the portion of any distribution that is
includible in gross income as an amount allocable to income on the
contract and the portion not includible in income as an amount
allocable to investment in the contract is generally determined under
section 72(e)(8). For example, if a nonqualified distribution of $5,000
is made from an employee's designated Roth account when the account
consists of $9,400 of designated Roth contributions and $600 of
earnings, the distribution consists of $4,700 of designated Roth
contributions (that are not includible in the employee's gross income)
and $300 of earnings (that are includible in the employee's gross
income).
Rollover of Designated Roth Contributions
As described above in the Background section of this preamble,
section 402(c)(2) provides that, if a portion of the distribution from
a plan qualified under section 401(a) is not includible in income
(determined without regard to the rollover), that portion of the
distribution can only be rolled over by a direct rollover of the
distribution to another plan qualified under section 401(a) that agrees
to separately account for the amount not includible in income.
(Alternatively the distribution can be rolled over to an IRA in either
a 60-day rollover or direct rollover.) The rule under section 402(c)(2)
requiring direct rollover is designed to insure that the portion of the
rolled over distribution that is investment in the contract is properly
accounted for in the recipient plan.
Section 402A(c)(3) provides that a rollover contribution of a
distribution from a designated Roth account may only be made to the
extent it is otherwise allowable. Section 402(c)(2) provides rules
regarding when a rollover contribution of amounts not includable in
gross income are allowable. The IRS and Treasury Department believe
that the rules in section 402(c)(2) relating to the distribution of an
amount not includable in gross income apply to a distribution from a
designated Roth account.\2\ Thus, these regulations would provide that
if the portion of a distribution from a designated Roth account under a
plan qualified under section 401(a) that is not includible in income is
to be rolled over into a designated Roth account under another plan,
the rollover of the distribution must be accomplished through a direct
rollover (i.e., a rollover to another designated Roth account is not
available for the portion of the distribution not includible in gross
income if the distribution is made directly to the employee) and can
only be made to a plan qualified under section 401(a) which agrees to
separately account for the amount not includible in income (i.e., it
cannot be rolled over into a section 403(b) plan). To insure that there
is proper accounting in the recipient plan, as described under
Reporting and recordkeeping the distributing plan is required to report
the amount of the investment in the contract and the first year of the
5-year period to the recipient plan so that the recipient plan will not
need to rely on information from the distributee.
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\2\ For distributions from designated Roth accounts, there is
the same need for proper accounting of investment in the contract as
for distributions from other accounts that include after-tax
contributions. In addition, it is necessary to track whether the
employee has satisfied the 5-year rule for qualified distributions.
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If a distribution from a designated Roth account is made to the
employee, the employee would still be able to roll over the entire
amount (or any portion thereof) into a Roth IRA within a 60-day period.
Under section 402(c)(2), if only a portion of the distribution is
rolled over, the portion that is not rolled over is treated as
consisting first of the amount of the distribution that is includible
in gross income. These regulations would provide that the income limits
for contributions for Roth IRAs do not apply for this purpose.
Alternatively, the employee is permitted to roll over the taxable
portion of the distribution to a designated Roth account under either a
section 401(a) or 403(b) plan within a 60-day period. In such a case,
additional reporting is required from the recipient plan, as described
below under the heading Reporting and recordkeeping. In addition, the
employee's period of participation under the distributing plan is not
carried over to the recipient plan for purposes of determining whether
the employee satisfies the 5-taxable-year requirement under the
recipient plan.
Determination of 5-Taxable-Year Period After a Rollover to a Roth IRA
Section 402A and section 408A each provide for a 5-taxable-year
period that must be completed in order for a distribution from a
designated Roth account or a Roth IRA to be a qualified distribution.
However, each of these sections contains different rules for
determining when the 5-taxable-year requirement is satisfied.
Generally, under section 402A, satisfaction of the 5-taxable-year
requirement with respect to a designated Roth account under a plan is
based on the years since a designated Roth contribution was first made
by the employee under that plan. In contrast, the 5-year period under
section 408A begins with the first taxable year for which a
contribution is made to any Roth IRA.
Commentators suggested that, if a distribution from a designated
Roth account to an individual is rolled into a Roth IRA, the individual
receive credit under the 5-year rule in section 408A for the years
since the individual first made a contribution to a designated Roth
account. The IRS and Treasury
[[Page 4323]]
Department do not believe that the Code permits this interaction
between the two 5-year rules. Instead, these proposed regulations would
provide that the 5-taxable-year period described in section 402A and
the 5-taxable-year period described in section 408A(d)(2)(B) are
determined independently. Thus, in the case of a rollover of a
distribution from a designated Roth account maintained under a section
401(k) or 403(b) plan to a Roth IRA, the period that the rolled-over
funds were in the designated Roth account does not count towards the 5-
taxable-year period for determining qualified distributions from the
Roth IRA. However, if an individual had established a Roth IRA in a
prior year, the 5-year period for determining qualified distributions
from a Roth IRA that began as a result of that earlier Roth IRA
contribution applies to any distributions from the Roth IRA (including
a distribution of an amount attributable to a rollover contribution
from a designated Roth account).
If a nonqualified distribution from a designated Roth account is
rolled over into a Roth IRA, the portion of the distribution that
constitutes a nontaxable return of investment in the contract is
treated as basis in the Roth IRA. However, the proposed regulations
would provide that, if a qualified distribution from a designated Roth
account is rolled over into a Roth IRA, the entire amount of the
distribution will be treated as basis in the Roth IRA. As a result, a
subsequent distribution from the Roth IRA in the amount of the rollover
would be treated as a tax-free return of basis regardless of whether
the individual had maintained a Roth IRA for 5 years (although the
investment return on that amount earned in the Roth IRA would not be
excluded from income when distributed unless the distribution satisfied
the requirements for a qualified distribution from a Roth IRA).
Under section 402A(c)(3)(B), only an amount rolled over from a
designated Roth account is not taken into account for purposes of
section 402A(c). Thus, these proposed regulations provide that a
distribution from a Roth IRA cannot be rolled over into a designated
Roth account.
Certain Amounts Not Qualified Distributions
Section 1.402(c)-2, A-4, provides a list of amounts that are not
treated as eligible rollover distributions and are instead currently
includible in income. These proposed regulations would provide that
these same amounts also cannot be qualified distributions.
Distributions described in A-4(a) (distribution of elective deferrals
in excess of the section 415 limits), (b) (corrective distribution of
excess deferrals), and (c) (corrective distribution of excess
contributions or excess aggregate contributions), have statutorily
specified tax treatments. In the case of a deemed distribution under
section 72(p) or the cost of current life insurance protection, an
actual amount has not in fact been distributed. In the case of
distributions of dividends deductible under section 404(k), section
72(e)(5)(D) and Sec. 1.404k-1(t) provide that these amounts are
treated as paid under a separate contract providing only for payment of
deductible dividends. However, if a dividend described in section
404(k) has been reinvested in accordance with section
404(k)(2)(iii)(II), then a distribution of the reinvested amount can be
a qualified distribution.
Distribution of Employer Securities
The proposed regulations would also provide rules relating to the
distribution of employer securities and the application of the net
unrealized appreciation election of section 402(e)(4). If a qualified
distribution includes employer securities, the distribution is not
includible in gross income and the basis of each security in the hands
of the distributee is the fair market value of the security on the date
of the distribution. In such a case, the distributee will receive
capital gains treatment at the time of any future disposition of the
security, to the extent of any post-distribution appreciation. If a
distribution with respect to employer securities is not a qualified
distribution, the rules of section 402(e)(4) apply in the same manner
as to any other distribution except that the designated Roth account is
treated as a separate contract.
Designated Roth Accounts Under Section 403(b) Plans
These proposed regulations amend the 2004 proposed section 403(b)
regulations to reflect the provisions of section 402A. Generally, these
proposed regulations merely incorporate basic and definitional rules
for a designated Roth program in Sec. 1.401(k)-1(f) under a section
401(k) plan into the 2004 proposed section 403(b) proposed regulations
under section 403(b). Further, these proposed regulations also
incorporate the taxation rules in section 402A into the 2004 proposed
regulations under section 403(b) and clarify the taxation rules of
section 402(c)(2) as they would apply to distributions from a section
403(b) plan. Thus, these proposed regulations provide that to the
extent some or all of the distribution from a section 403(b) plan
(including a distribution of an amount from a designated Roth account)
would not have been includible in gross income if it were not rolled
over, that portion of the distribution can only be rolled over into an
individual retirement plan, or through a direct rollover to another
section 403(b) plan which agrees to separately account for such rolled
over amounts.
However, there is one issue that is unique to section 403(b) plans:
the interaction between the right to make designated Roth contributions
and the universal availability requirement in section
403(b)(12)(A)(ii). These proposed regulations provide that the
universal availability requirement of section 403(b)(12) includes the
right to make designated Roth contributions. Thus, if any employee is
given the opportunity to designate section 403(b) elective deferrals as
designated Roth contributions, then all employees must be given that
right. These proposed regulations do not address what other rights with
respect to section 403(b) elective deferrals under a section 403(b)
plan may also be subject to the universal availability requirement.
Reporting and Recordkeeping
Under these proposed regulations, the plan administrator or other
responsible party with respect to a plan with a designated Roth account
would be responsible for keeping track of the 5-taxable-year period for
each employee and the amount of designated Roth contributions made on
behalf of such employee. In addition, the plan administrator or other
responsible party of a plan directly rolling over a distribution would
be required to provide the plan administrator of the recipient plan
(i.e., the plan accepting the eligible rollover distribution) with a
statement indicating either the first year of the 5-taxable-year period
for the employee and the portion of such distribution attributable to
basis or that the distribution is a qualified distribution. If the
distribution is not a direct rollover to a designated Roth account
under another eligible plan, the plan administrator or responsible
party must provide to the employee, upon request, this same
information, except the statement need not indicate the first year of
the 5-taxable-year period. The statement would be required to be
provided within a reasonable period following the direct rollover (or
employee request), but in no event later than 30 days following the
direct rollover (or employee request), and the plan administrator or
other responsible
[[Page 4324]]
party for the recipient plan would be permitted to rely on these
statements.
In order to give plans sufficient time to develop systems to comply
with these reporting requirements, these reporting and record keeping
requirements are proposed to be effective beginning with the 2007
taxable year. However, plan administrators are cautioned that it will
not be possible for a plan to comply with the separate accounting
requirement under section 402A and the recently published final
regulations with respect to Roth 401(k) plans without keeping track of
each employee's investment in the contract under the designated Roth
account. Further, for any plan accepting a rollover from another
designated Roth account, the proposed regulations only permit reliance
for purposes of the record keeping requirement in future years on a
statement from the plan administrator (or other responsible party) for
the other plan. Consequently, we would anticipate that plans accepting
a rollover contribution to a designated Roth account during 2006 would
request representations from the other plan administrator (or
responsible party) that the distribution being rolled over is from a
designated Roth account and stating what portion of the distribution is
investment in the contract.
As noted above, to the extent that a portion of a distribution is
includible in income (determined without regard to the rollover), if
any portion of that distribution is rolled over to a designated Roth
account by the distributee rather than by direct rollover, the plan
administrator of the recipient plan must notify the IRS of its
acceptance of the rollover contribution. The notification is required
to be sent to an address to be specified by the Commissioner and must
include: (1) The employee's name and social security number; (2) the
amount rolled over; (3) the year in which the rollover contribution was
made; and (4) such other information as the Commissioner may require in
future published guidance in order to determine that the amount rolled
over is a valid rollover contribution.
With respect to other reporting, generally, the same reporting
requirements apply to plans with designated Roth accounts as apply to
other plans. A contribution to and a distribution from a designated
Roth account must be reported on Form W-2 and Form 1099-R,
``Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRA, Insurance Contracts'' respectively, in accordance with the
instructions thereto. It is expected that the instructions to Form
1099-R will be changed to require that a separate Form 1099-R be used
to report the amount of a distribution from a designated Roth account,
the taxable amount with respect to the distribution, and the first year
of the 5-taxable year period. An employee has no reporting obligation
with respect to designated Roth contributions under a section 401(k) or
403(b) plan. However, an employee rolling over a distribution from a
designated Roth account to a Roth IRA should keep track of the amount
rolled over in accordance with the instructions to Form 8606,
``Nondeductible IRA's.''
Designated Roth Contributions as Excess Deferrals
Even though designated Roth contributions are not excluded from
income when contributed, they are treated as elective deferrals for
purposes of section 402(g). Thus, to the extent total elective
deferrals for the year exceed the section 402(g) limit for the year,
the excess amount can be distributed by April 15th of the year
following the year of the excess without adverse tax consequences.
However, if such excess deferrals are not distributed by April 15th of
the year following the year of the excess, these proposed regulations
would provide that any distribution attributable to an excess deferral
that is a designated Roth contribution is includible in gross income
(with no exclusion from income for amounts attributable to basis under
section 72) and is not eligible for rollover. These regulations would
provide that if there are any excess deferrals that are designated Roth
contributions that are not corrected prior to April 15th of the year
following the excess, the first amounts distributed from the designated
Roth account are treated as distributions of excess deferrals and
earnings until the full amount of the those excess deferrals (and
attributable earnings) are distributed.
Gap Period Income
In addition, these proposed regulations conform the gap period
income rules for a distribution of excess deferrals under section
402(g) to the gap period income rules in the 2004 final section 401(k)
and 401(m) regulations by providing that gap period income (i.e.,
income for the period after the taxable year) needs to be included in
the distribution to the extent the employee is or would be credited
with allocable gain or loss on those excess deferrals for that period,
if the total account were to be distributed. This gap period income
rule applies to both pre-tax excess deferrals and designated Roth
contributions.
Effective Date
Section 402A applies to employees' taxable years beginning on or
after January 1, 2006. The proposed regulations under section 402A are
generally proposed to be applicable for taxable years beginning on or
after January 1, 2007. However, certain provisions in the proposed
regulations under section 402A are proposed to be applicable at the
same time as section 402A. These include the clarification that the
separate accounting requirement does not permit any transaction or
accounting methodology that transfers value between designated Roth
accounts and other accounts under a plan and the rules relating to
rollovers to designated Roth accounts and Roth IRAs. Similarly, the
proposed regulations under section 408A would be applicable at the same
time as section 402A. These proposed regulations also address the
treatment of rollover contributions to Roth IRAs and designated Roth
accounts.
The proposed amendments to the regulations under section 402(g)
relating to designated Roth contributions also are proposed to be
applicable at the same time as section 402A. Thus, those proposed
amendments would be applicable for excess deferrals for taxable years
beginning on or after January 1, 2006. The rule requiring distribution
of gap period income on excess deferrals applies to distributions in
taxable years beginning on or after January 1, 2007, and thus will
generally also apply for excess deferrals for taxable years beginning
on or after January 1, 2006. As a result, this requirement generally
would become applicable when the corresponding requirement under the
2004 final 401(k) and (m) regulations that distributions to correct
excess contributions and excess aggregate contributions include gap
period income becomes applicable.
The proposed amendments to the 2004 proposed section 403(b)
regulations will not be applicable earlier than the applicability date
of those regulations when they are finalized. The IRS and Treasury
Department expect that the 2004 proposed section 403(b) regulations
when finalized will be applicable for taxable years on or after January
1, 2007.
For the period after section 402A is applicable and before these
proposed regulations are made final, taxpayers may rely on these
proposed regulations. If, and to the extent, future guidance is more
restrictive than the guidance in
[[Page 4325]]
these proposed regulations, the future guidance will be applied without
retroactive effect.
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.
Special Analyses
It has been determined that this notice of proposed rulemaking is
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 will maintain a designated Roth
account already use a third party provider to administer the plan and
the collection of information in these regulations, which is required
to comply with the separate accounting and recordkeeping requirements
of section 402A(b), will only minimally increase the third party
provider's administrative burden with respect to 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, this notice
of proposed rulemaking will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department specifically request comments on
the clarity of the proposed regulations and how they may be made easier
to understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by
any person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Cathy Vohs and R.
Lisa Mojiri-Azad, Office of Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). However, other personnel from the
IRS and Treasury Department participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.402A-1 is also issued
under 26 U.S.C. 402A .* * *
Par. 2. Section 1.402(g)-1 is amended as follows:
1. Revise the second sentence and add a third sentence to paragraph
(a).
2. Add new paragraphs (b)(5) and (b)(6).
3. Revise paragraph (d).
4. Revise paragraph (e)(2) introductory text.
5. Revise paragraph (e)(2)(i).
6. Revise the second sentence and add a new third sentence in
paragraph (e)(3)(i)(A).
7. Revise paragraph (e)(5)(i).
8. Add a sentence after the last sentence in paragraph (e)(5)(ii).
9. Revise paragraph (e)(5)(iii).
10. Add paragraph (e)(5)(v).
11. Add paragraph (e)(8)(iv).
The additions and revisions to Sec. 1.402(g)-1 read as follows:
Sec. 1.402(g)-1 Limitation on exclusion for elective deferrals.
(a) In general. * * * Thus, an individual's elective deferrals in
excess of the applicable limit for a taxable year (i.e., the
individual's excess deferrals for the year) must be included in gross
income for the year , except to the extent the excess deferrals are
comprised of designated Roth contributions, and thus, are already
includible in gross income. A designated Roth contribution is treated
as an excess deferral only to the extent that the total amount of
designated Roth contributions for an individual exceeds the applicable
limit for the taxable year or the designated Roth contributions are
identified as excess deferrals and the individual receives a
distribution of the excess deferrals and allocable income under
paragraph (e)(2) or (e)(3) of this section.
(b) * * *
(5) Any designated Roth contributions described in section 402A
(before applying the limits of section 402(g) or this section).
(6) Any elective employer contributions to a SIMPLE retirement
account, on behalf of an employee pursuant to a qualified salary
reduction arrangement as described in section 408(p)(2) (before
applying the limits of section 402(g) or this section).
* * * * *
(d) Applicable limit--(1) In general. Except as provided under
paragraph (d)(2) of this section, the applicable limit for an
individual's taxable year is the applicable dollar amount set forth in
section 402(g)(1)(B). This applicable dollar amount is increased for
the taxable year beginning in 2007 and later years in the same manner
as the dollar amount under section 415(b)(1)(A) is adjusted pursuant to
section 415(d). See Sec. 1.402(g)-2 for the treatment of catch-up
contributions described in section 414(v).
(2) Special adjustment for elective deferrals with respect to
section 403(b) annuity contracts for certain long-term employees. The
applicable limit for an individual who is a qualified employee (as
defined in section 402(g)(7)(C)) and has elective deferrals described
in paragraph (b)(3) or (5) of this section for a taxable year is
adjusted by increasing the applicable limit otherwise determined under
paragraph (d)(1) of this section in accordance with section 402(g)(7).
(e) * * *
(2) Correction of excess deferrals after the taxable year. A plan
may provide that if any amount is an excess deferral under paragraph
(a) of this section:
(i) Not later than the first April 15 (or such earlier date
specified in the plan) following the close of the individual's taxable
year, the individual may notify each plan under which deferrals were
made of the amount of the excess deferrals received by the plan. If any
designated Roth contributions were made to a plan, the notification
must also identify the extent to which, if any, the excess deferrals
are comprised of designated Roth contributions. A plan may provide that
an individual is deemed to have notified the plan of excess deferrals
(including the portion of excess deferrals that are comprised of
designated Roth contributions) to the extent the individual has excess
deferrals for the taxable year calculated by taking into account only
elective
[[Page 4326]]
deferrals under the plan and other plans of the same employer and the
plan may provide the extent to which such excess deferrals are
comprised of designated Roth contributions. A plan may instead provide
that the employer may notify the plan on behalf of the individual under
these circumstances.
(3) * * *
(i) * * *
(A) * * * If any designated Roth contributions were made to a plan,
the notification must identify the extent to which, if any, the excess
deferrals are comprised of designated Roth contributions. A plan may
provide that an individual is deemed to have notified the plan of
excess deferrals (including the portion of excess deferrals that are
comprised of designated Roth contributions) for the taxable year
calculated by taking into account only elective deferrals under the
plan and other plans of the same employer and the plan may provide the
extent to which such excess deferrals are comprised of designated Roth
contributions. * * *
* * * * *
(5) Income allocable to excess deferrals--(i) General rule. The
income allocable to excess deferrals is equal to the sum of the
allocable gain or loss for the taxable year of the individual and, in
the case of a distribution in a taxable year beginning on or after
January 1, 2007, made to correct an excess deferral, to the extent the
excess deferrals are or will be credited with gain or loss for the gap
period (i.e., the period after the close of the taxable year and prior
to the distribution) if the total account were to be distributed, the
allocable gain or loss during that period.
(ii) Method of allocating income. * * * A plan will not fail to use
a reasonable method for computing the income allocable to excess
deferrals merely because the income allocable to excess deferrals is
determined on a date that is no more than 7 days before the
distribution.
(iii) Alternative method of allocating taxable year income. A plan
may determine the income allocable to excess deferrals for the taxable
year by multiplying the income for the taxable year allocable to
elective deferrals by a fraction. The numerator of the fraction is the
excess deferrals by the employee for the taxable year. The denominator
of the fraction is equal to the sum of:
(A) The total account balance of the employee attributable to
elective deferrals as of the beginning of the taxable year, plus
(B) The employee's elective deferrals for the taxable year.
* * * * *
(v) Alternative method for allocating plan year and gap period
income. A plan may determine the allocable gain or loss for the
aggregate of the taxable year and the gap period by applying the
alternative method provided by paragraph (e)(5)(iii) of this section to
this aggregate period. This is accomplished by substituting the income
for the taxable year and the gap period for the income for the taxable
year and by substituting the elective deferrals for the taxable year
and the gap period for the elective deferrals for the taxable year in
determining the fraction that is multiplied by that income.
* * * * *
(8) * * *
(iv) Distributions of excess deferrals from a designated Roth
account. The rules of paragraph (e)(8)(iii) of this section generally
apply to distributions of excess deferrals that are designated Roth
contributions and the attributable income. Thus, if a designated Roth
account described in section 402A includes any excess deferrals, any
distribution of amounts attributable to those excess deferrals are
includible in gross income (without adjustment for any return of
investment in the contract under section 72(e)(8)). In addition, such
distributions cannot be qualified distributions described in section
402A(d)(2) and are not eligible rollover distributions within the
meaning of section 402(c)(4). For this purpose, if a designated Roth
account includes any excess deferrals, any distributions from the
account are treated as attributable to those excess deferrals until the
total amount distributed from the designated Roth account equals the
total of such deferrals and attributable income.
* * * * *
Par. 3. Sections 1.402A-1 and 1.402A-2 are added to read as
follows:
Sec. 1.402A-1 Designated Roth Accounts
Q-1: What is a designated Roth account?
A-1: A designated Roth account is a separate account under a
qualified cash or deferred arrangement under a section 401(a) plan, or
under a section 403(b) plan, to which designated Roth contributions are
made that satisfies the requirements of Sec. 1.401(k)-1(f) (in the
case of a section 401(a) plan) or Sec. 1.403(b)-3(c) (in the case of a
section 403(b) plan).
Q-2. How is a distribution from a designated Roth account taxed?
A-2. (a) The taxation of a distribution from a designated Roth
account depends on whether or not the distribution is a qualified
distribution. A qualified distribution from a designated Roth account
is not includible in the distributee's gross income.
(b) Except as otherwise provided in paragraph (c) of this A-2, a
qualified distribution is a distribution that is both--
(1) Made after the 5-taxable-year period of participation defined
in A-4 of this section has been completed; and
(2) Made on or after the date the employee attains age 59\1/2\,
made to a beneficiary or the estate of the employee on or after the
employee's death, or attributable to the employee's being disabled
within the meaning of section 72(m)(7).
(c) A distribution from a designated Roth account is not a
qualified distribution to the extent it consists of a distribution of
excess deferrals and attributable income described in Sec. 1.402(g)-
1(e). See A-11 of this section for other amounts that are not treated
as qualified distributions, including excess contributions described in
section 401(k)(8), or excess aggregate contributions described in
section 401(m)(8), and income on any of these excess amounts.
Q-3. How is a distribution from a designated Roth account taxed if
it is not a qualified distribution?
A-3. Except as provided in A-11 of this section, a distribution
from a designated Roth account that is not a qualified distribution is
taxable to the distributee under section 402 in the case of a plan
qualified under section 401(a) and under section 403(b)(1) in the case
of a section 403(b) plan. For this purpose, a designated Roth account
is treated as a separate contract under section 72. Thus, except as
otherwise provided in A-5 of this section for a rollover, if a
distribution is before the annuity starting date, the portion of any
distribution that is includible in gross income as an amount allocable
to income on the contract and the portion not includible in gross
income as an amount allocable to investment in the contract is
determined under section 72(e)(8), treating the designated Roth account
as a separate contract. Similarly, if a distribution is on or after the
annuity starting date, the portion of any annuity payment that is
includible in gross income as an amount allocable to income on the
contract and the portion not includible in gross income as an amount
allocable to investment in the contract is determined under section
72(b), treating the designated Roth account as a separate contract. For
purposes of section 72, designated Roth contributions are employer
contributions described in section 72(f)(1) (contributions that are
includible in gross income).
[[Page 4327]]
Q-4. What is the 5-taxable-year period of participation described
in A-2 of this section?
A-4. (a) The 5-taxable-year period of participation described in A-
2 of this section for a plan is the period of 5 consecutive taxable
years that begins with the first day of the first taxable year in which
the employee makes a designated Roth contribution to any designated
Roth account established for the employee under the same plan and ends
when 5 consecutive taxable years have been completed. For this purpose,
the first taxable year in which an employee makes a designated Roth
contribution is the year in which the amount is includible in the
employee's gross income.
(b) Generally, an employee's 5-taxable-year period of participation
is determined separately for each plan (within the meaning of section
414(1)) in which the employee participates. Thus, if an employee has
elective deferrals made to designated Roth accounts under two or more
plans, the employee may have two or more different 5-taxable-year
periods of participation, depending on when the employee first had
contributions made to a designated Roth account under each plan.
However, if a direct rollover contribution of a distribution from a
designated Roth account under another plan is made by the employee to
the plan, the 5-taxable-year period of participation begins on the
first day of the employee's taxable year in which the employee first
had designated Roth contributions made to such other designated Roth
account, if earlier.
(c) The beginning of the 5-taxable-year period of participation is
not redetermined for any portion of an employee's designated Roth
account. This is true even if the employee dies or the account is
divided pursuant to a qualified domestic relations order, and thus, a
portion of the account is not payable to the employee and is payable to
the employee's beneficiary or an alternate payee. The same rule applies
if the entire designated Roth account is distributed during the 5-
taxable-year period of participation and the employee subsequently
makes additional designated Roth contributions under the plan.
Q-5. How do the taxation rules apply to a distribution from a
designated Roth account that is rolled over?
A-5. (a) An eligible rollover distribution from a designated Roth
account is permitted to be rolled over into another designated Roth
account or a Roth IRA, and the amount rolled over is not currently
includable in gross income. In accordance with section 402(c)(2), to
the extent that a portion of a distribution from a plan qualified under
section 401(a) is not includible in income (determined without regard
to the rollover), if that portion of the distribution is to be rolled
over into a designated Roth account, the rollover must be accomplished
through a direct rollover of the entire distribution (i.e., a 60 day
rollover to another designated Roth account is not available for this
portion of the distribution) and can only be made to another plan
qualified under section 401(a) which agrees to separately account for
the amount not includible in income (i.e., it cannot be rolled over
into a section 403(b) plan). See Sec. 1.403(b)-7(a) for the
corresponding rule applicable to section 403(b) plans. If a
distribution from a designated Roth account is instead made to the
employee, the employee would still be able to roll over the entire
amount (or any portion thereof) into a Roth IRA within the 60-day
period described in section 402(c)(3).
(b) In the case of an eligible rollover distribution from a
designated Roth account that is not a qualified distribution, if the
entire amount of the distribution is not rolled over, the part that is
rolled over is deemed to consist first of the portion of the
distribution that is attributable to income under section 72(e)(8).
(c) If an employee receives a distribution from a designated Roth
account, the portion of the distribution that would be includible in
gross income is permitted to be rolled over into a designated Roth
account under another plan. In such a case, Sec. 1.402A-2, A-3,
provides for additional reporting by the recipient plan. In addition,
the employee's period of participation under the distributing plan is
not carried over to the recipient plan for purposes of satisfying the
5-taxable-year period of participation requirement under the recipient
plan.
(d) The following example illustrates the application of this A-5--
Example. Employee B receives a $14,000 eligible rollover
distribution that is not a qualified distribution from B's
designated Roth account, consisting of $11,000 of investment in the
contract and $3,000 of income. Within 60 days of receipt, Employee B
rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is
deemed to consist of $3,000 of income and $4,000 of investment in
the contract. Because the only portion of the distribution that
could be includible in gross income (the income) is rolled over,
none of the distribution is includible in Employee B's gross income.
(e) This A-5 applies for taxable years beginning on or after
January 1, 2006.
Q-6. In the case of a rollover contribution to a designated Roth
account, how is the amount that is treated as investment in the
contract under section 72 determined?
A-6. If the entire amount of a distribution from a designated Roth
account is rolled over to another designated Roth account, the amount
of the rollover contribution allocated to investment in the contract in
the recipient designated Roth account is the amount that would not have
been includible in gross income (determined without regard to section
402(e)(4)) if the distribution had not been rolled over. Thus, if an
amount that is a qualified distribution is rolled over, the entire
amount of the rollover contribution is allocated to investment in the
contract. If less than the entire amount of a distribution is rolled
over, A-5(b) of this section provides a rule for determining the
portion of the rollover contribution treated as investment in the
contract.
Q-7. After a qualified distribution from a designated Roth account
has been made, how is the remaining investment in the contract of the
designated Roth account determined under section 72?
A-7. (a) The portion of any qualified distribution that is treated
as a recovery of investment in the contract is determined in the same
manner as if the distribution were not a qualified distribution. (See A
3 of this section) Thus, the remaining investment in the contract in a
designated Roth account after a qualified distribution is determined in
the same manner after a qualified distribution as it would be
determined if the distribution were not a qualified distribution.
(b) The following example illustrates the application of this A-7--
Example. Employee C receives a $12,000 distribution, which is a
qualified distribution that is attributable to the employee being
disabled within the meaning of section 72(m)(7), from C's designated
Roth account. Immediately prior to the distribution, the account
consisted of $21,850 of investment in the contract (i.e., designated
Roth contributions) and $1,150 of income. For purposes of
determining recovery of investment in the contract under section 72,
the distribution is deemed to consist of $11,400 of investment in
the contract [$12,000 x 21,850/(1,150 + 21,850)], and $600 of income
[$12,000 x 1,150/(1,150 + 21,850)]. Immediately after the
distribution, C's designated Roth account consists of $10,450 of
investment in the contract and $550 of income. This determination of
the remaining investment in the contract will be needed if C
subsequently is no longer disabled and takes a nonqualified
distribution from the designated Roth account.
[[Page 4328]]
Q-8. What is the relationship between the accounting for designated
Roth contributions as investment in the contract for purposes of
section 72 and their treatment as elective deferrals available for a
hardship distribution under section 401(k)(2)(B)?
A-8. (a) There is no relationship between the accounting for
designated Roth contributions as investment in the contract for
purposes of section 72 and their treatment as elective deferrals
available for a hardship distribution under section 401(k)(2)(B). A
plan that makes a hardship distribution under section 401(k)(2)(B) from
elective deferrals that includes designated Roth contributions must
separately determine the amount of elective deferrals available for
hardship and the amount of investment in the contract attributable to
designated Roth contributions for purposes of section 72. Thus, the
entire amount of a hardship distribution is treated as reducing the
otherwise maximum distributable amount for purposes of applying the
rule in section 401(k)(2)(B) and Sec. 1.401(k)-1(d)(3)(ii) that
generally limits hardship distributions to the principal amount of
elective deferrals made less the amount of elective deferrals
previously distributed from the plan, even if a portion of the
distribution is treated as income under section 72(e)(8).
(b) The following example illustrates the application of this A-8--
Example. Assume the same facts as in the Example in A-7 of this
section, except that Employee C is not disabled, the distribution is
a hardship distribution, and Employee C has received no previous
distributions of elective deferrals from the plan. The adjustment to
the investment in the contract is the same as in A-7 of this
section, but for purposes of determining the amount of elective
deferrals available for future hardship distribution, the entire
amount of the distribution is subtracted from the maximum
distributable amount. Thus, Employee C has only $9,850 ($21,850 -
$12,000) available for hardship distribution from C's designated
Roth account.
Q-9. Can an employee have more than one separate contract for
designated Roth contributions under a plan qualified under section
401(a) or a section 403(b) plan?
A-9. (a) Except as otherwise provided in paragraph (b) of this A-9,
for purposes of section 72, there is only one separate contract for an
employee with respect to the designated Roth contributions under a
plan. Thus, if a plan maintains one separate account for designated
Roth contributions made under the plan and another separate account for
rollover contributions received from a designated Roth account under
another plan (so that the rollover account is not required to be
subject to the distribution restrictions otherwise applicable to the
account consisting of designated Roth contributions made under the
plan), both separate accounts are considered to be one contract for
purposes of applying section 72 to the distributions from either
account.
(b) If a separate account with respect to an employee's accrued
benefit consisting of designated Roth contributions is established and
maintained for an alternate payee pursuant to a qualified domestic
relations order and another designated Roth account is maintained for
the employee, each account is treated as a separate contract for
purposes of section 72. The alternate payee's designated Roth account
is also a separate contract for purposes of section 72 with respect to
any other account maintained for that alternate payee. Similarly, if
separate accounts are established and maintained for different
beneficiaries after the death of an employee, the separate account for
each beneficiary is treated as a separate contract under section 72 and
is also a separate contract with respect to any other account
maintained for that beneficiary under the plan that is not a designated
Roth account. When the separate account is established for an alternate
payee or for a beneficiary (after an employee's death), each separate
account must receive a proportionate amount attributable to investment
in the contract.
Q-10. What is the tax treatment of employer securities distributed
from a designated Roth account?
A-10. (a) If a distribution of employer securities from a
designated Roth account is not a qualified distribution, section
402(e)(4)(B) applies. Thus, in the case of a lump-sum distribution that
includes employer securities, unless the taxpayer elects otherwise, net
unrealized appreciation attributable to the employer securities is not
includible in gross income; and such net unrealized appreciation is not
included in the basis of the distributed securities and is capital gain
to the extent such appreciation is realized in a subsequent taxable
transaction.
(b) In the case of a qualified distribution of employer securities
from a designated Roth account, the distributee's basis in the
distributed securities for purposes of subsequent disposition is their
fair market value at the time of distribution.
Q-11. Can an amount described in A-4 of Sec. 1.402(c)-2 with
respect to a designated Roth account be a qualified distribution?
A-11. No. An amount described in A-4 of Sec. 1.402(c)-2 with
respect to a designated Roth account cannot be a qualified
distribution. Such an amount is taxable under the rules of Sec. Sec.
1.72-16(b), 1.72(p)-1, A-11 through A-13, 1.402(g)-1(e)(8), 1.401(k)-
2(b)(2)(vi), 1.401(m)-2(b)(2)(vi), or 1.404(k)-1T. Thus, for example,
loans that are treated as deemed distributions pursuant to section
72(p), or dividends paid on employer securities as described in section
404(k) are not qualified distributions even if the deemed distributions
occur or the dividends are paid after the employee attains age 59\1/2\
and the 5-taxable-year period of participation defined in A-4 of this
section has been satisfied. However, if a dividend is reinvested in
accordance with section 404(k)(2)(A)(iii)(II), the amount of such a
dividend is not precluded from being a qualified distribution if later
distributed.
Q-12. If any amount from a designated Roth account is included in a
loan to an employee, do the plan aggregation rules of section
72(p)(2)(D) apply for purposes of determining the total amount an
employee is permitted to borrow from the plan, even though the
designated Roth account generally is treated as a separate contract
under section 72?
A-12. Yes. If any amount from a designated Roth account is included
in a loan to an employee, notwithstanding the general rule that the
designated Roth account is treated as a separate contract under section
72, the plan aggregation rules of section 72(p)(2)(D) apply for
purposes of determining the maximum amount the employee is permitted to
borrow from the plan and such amount is based on the total of the
designated Roth contributions amounts and the other amounts under the
plan, regardless of whether the loan is from the designated Roth
account or other accounts under the plan. However, to the extent a loan
is from a designated Roth account, the repayment requirement of section
72(p)(2)(C) must be satisfied separately with respect to that portion
of the loan and with respect to the portion of the loan from other
accounts under the plan.
Q-13. Does a transaction or accounting methodology involving an
employee's designated Roth account and any other accounts under the
plan or plans of an employer that has the effect of transferring value
from the other accounts into the designated Roth account violate the
separate accounting requirement of section 402A?
A-13. Yes. Any transaction or accounting methodology involving an
employee's designated Roth account
[[Page 4329]]
and any other accounts under the plan or plans of an employer that has
the effect of directly or indirectly transferring value from another
account into the designated Roth account violates the separate
accounting requirement under section 402A. However, any transaction
that merely exchanges investments between accounts at fair market value
will not violate the separate accounting requirement. This A-13 applies
to designated Roth accounts for taxable years beginning on or after
January 1, 2006.
Q-14. When is section 402A and this Sec. 1.402A-1 applicable?
A-14. Section 402A is applicable for taxable years beginning on or
after January 1, 2006. Except as otherwise provided in A-5 and A-13 of
this section, the rules of this Sec. 1.402A-1 apply for taxable years
beginning on or after January 1, 2007.
Sec. 1.402A-2 Reporting and recordkeeping requirements with respect
to designated Roth accounts.
Q-1. Who is responsible for keeping track of the 5-taxable-year
period of participation and the investment in the contract, i.e., the
amount of unrecovered designated Roth contributions for the employee?
A-1. The plan administrator or other responsible party with respect
to a plan with a designated Roth account is responsible for keeping
track of the 5-taxable-year period of participation for each employee
and the amount of investment in the contract (unrecovered designated
Roth contributions) on behalf of such employee. For purposes of the
preceding sentence, in the absence of actual knowledge to the contrary,
the plan administrator or other responsible party is permitted to
assume that an employee's taxable year is the calendar year. In the
case of a direct rollover from another designated Roth account, the
plan administrator or other responsible party of the recipient plan can
rely on reasonable representations made by the plan administrator or
responsible party with respect to the plan with the other designated
Roth account. See A-2 of this section for statements required in the
case of rollovers.
Q-2. In the case of an eligible rollover distribution from a
designated Roth account, what additional information must be provided
with respect to such distribution?
A-2. (a) Pursuant to section 6047(f), if an amount is distributed
from a designated Roth account, the plan administrator or other
responsible party with respect to the plan must provide a statement as
described below in the following situations--
(1) In the case of a direct rollover of a distribution from a
designated Roth account under a plan to a designated Roth account under
another plan, the plan administrator or other responsible party must
provide to the plan administrator or responsible party of the recipient
plan either a statement indicating the first year of the 5-taxable-year
period described in A-1 of this section and the portion of the
distribution that is attributable to investment in the contract under
section 72, or a statement that the distribution is a qualified
distribution.
(2) If the distribution is not a direct rollover to a designated
Roth account under another plan, the plan administrator or responsible
party must provide to the employee, upon request, the same information
described in paragraph (a)(1) of this A-2, except the statement need
not indicate the first year of the 5-taxable-year period described in
A-1 of the section.
(b) The statement described in paragraph (a) of this A-2 must be
provided within a reasonable period following the direct rollover or
distributee request but in no event later than 30 days following the
direct rollover or distributee request.
Q-3. If a plan qualified under section 401(a) or a section 403(b)
plan accepts a 60-day rollover of earnings from a designated Roth
account, what report to the IRS must be provided with respect to such
rollover contribution?
A-3. A plan qualified under section 401(a), or a section 403(b)
plan, accepting a rollover contribution (other than a direct rollover
contribution) under section 402(c)(2), or section 403(b)(8)(B), of the
portion of a distribution from a designated Roth account that would
have been includable in gross income must notify the Commissioner of
its acceptance of the rollover contribution no later than the due date
for filing Form 1099-R, ``Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRA, Insurance Contracts.'' The
notification is required to be sent to an address to be specified by
the Commissioner and must include the employee's name and social
security number, the amount rolled over, the year in which the rollover
contribution was made, and such other information as the Commissioner,
in revenue rulings, notices, or other published guidance in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter) may
require in order to determine that the amount rolled over is a valid
rollover contribution.
Q-4. When is this Sec. 1.402A-2 applicable?
A-4. The rules of this Sec. 1.402A-2 are applicable for taxable
years beginning on or after January 1, 2007.
Par. 4. Section 1.403(b)-2, as set forth in Paragraph 5 of the 2004
section 403(b) proposed regulations (69 FR 67075) is amended by
revising paragraph (a)(17) to read as follows:
Sec. 1.403(b)-2 Definitions.
(a) * * *
(17) Section 403(b) elective deferral; designated Roth
contribution--(i) Section 403(b) elective deferral means an elective
deferral that is an employer contribution to a section 403(b) plan for
an employee. See Sec. 1.403(b)-5(b) for additional rules with respect
to a section 403(b) elective deferral.
(ii) Designated Roth contribution under a section 403(b) plan means
a section 403(b) elective deferral that satisfies Sec. 1.403(b)-3(c).
* * * * *
Par. 5. Section 1.403(b)-3, as set forth in paragraph 5 of the 2004
section 403(b) proposed regulations (69 FR 67075) is amended to read as
follows:
1. A sentence is added to the end of paragraph (a) introductory
text.
2. Paragraph (c) is redesignated as paragraph (d) and a new
paragraph (c) is added.
Sec. 1.403(b)-3 Exclusion for contributions to purchase section
403(b) contracts.
(a) Exclusion for section 403(b) contracts. * * * However, the
preceding two sentences do not apply to designated Roth contributions;
see paragraph (c) of this section and Sec. 1.403(b)-7(e) for special
taxation rules that apply with respect to designated Roth contributions
under a section 403(b) plan.
* * * * *
(c) Special rules for designated Roth contributions. (1) The rules
of Sec. 1.401(k)-1(f)(1) and (2) for designated Roth contributions
under a qualified cash or deferred arrangement apply to designated Roth
contributions under a section 403(b) plan. Thus, a designated Roth
contribution under a section 403(b) plan is a section 403(b) elective
deferral that is 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 section 403(b) elective
deferrals the employee is otherwise eligible to make under the plan;
that is 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
[[Page 4330]]
deferred election (e.g., by treating the contributions as wages subject
to applicable withholding requirements); and that is maintained in a
separate account (within the meaning of Sec. 1.401(k)-1(f)(2)).
(2) A designated Roth contribution under a section 403(b) plan must
satisfy the requirements applicable to section 403(b) elective
deferrals. Thus, for example, designated Roth contributions under a
section 403(b) plan must satisfy the requirements of Sec. 1.403(b)-
6(d). Similarly, a designated Roth account under a section 403(b) plan
is subject to the rules of section 401(a)(9)(A) and (B) and Sec.
1.403(b)-6(e).
* * * * *
Par. 6. Section 1.403(b)-5, as set forth in paragraph 5 of the 2004
section 403(b) proposed regulations (69 FR 67075), is amended by adding
a sentence to the end of paragraph (b)(1) to read as follows:
Sec. 1.403(b)-5 Nondiscrimination rules.
* * * * *
(b) * * *
(1) * * * Further, the employee's right to make elective deferrals
also includes the right to designate section 403(b) elective deferrals
as designated Roth contributions.
* * * * *
Par. 7. Section 1.403(b)-7, as set forth in paragraph 5 of the 2004
section 403(b) proposed regulations (69 FR 67075), is amended as
follows:
1. A sentence is added before the last sentence in paragraph
(b)(1).
2. A sentence is added before the last sentence in paragraph (b)(2)
3. A paragraph (e) is added.
The additions are to read as follows:
Sec. 1.403(b)-7 Taxation of distributions and benefits
* * * * *
(b) * * *
(1) * * * Thus, to the extent that a portion of a distribution
(including a distribution from a designated Roth account) would be
excluded from gross income if it were not rolled over, if that portion
of the distribution is to be rolled over into an eligible retirement
plan that is not an IRA, the rollover must be accomplished through a
direct rollover of the entire distribution (i.e., a 60-day rollover to
another section 403(b) plan is not available for this portion of the
distribution) to a section 403(b) plan that agrees to separately
account for the amount not includible in income (i.e., it cannot be
rolled over into a plan qualified under section 401(a)). * * *
(2) * * * Thus, the special rule in Sec. 1.401(k)-1(f)(3)(ii) with
respect to distributions from a designated Roth account that are
expected to total less than $200 during a year applies to designated
Roth accounts under a section 403(b) plan. * * *
* * * * *
(e) Special rules relating to distributions from a designated Roth
account. If an amount is distributed from a designated Roth account
under a section 403(b) plan, the amount, if any, that is includible in
gross income and the amount, if any, that may be rolled over to another
section 403(b) plan is determined under Sec. 1.402A-1. Thus, the
designated Roth account is treated as a separate contract for purposes
of section 72. For example, the rules of section 72(b) must be applied
separately to annuity payments with respect to a designated Roth
account under a section 403(b) plan and separately to annuity payments
with respect to amounts attributable to any other contributions to the
section 403(b) plan.
Par. 8. Section 1.408A-10 is added to read as follows:
Sec. 1.408A-10 Coordination between designated Roth accounts and Roth
IRAs
Q-1. Can an eligible rollover distribution, within the meaning of
section 402(c)(4), from a designated Roth account as defined in A-1 of
Sec. 1.402A-1, be rolled over to a Roth IRA?
A-1. Yes. An eligible rollover distribution, within the meaning of
section 402(c)(4), from a designated Roth account may be rolled over to
a Roth IRA. For purposes of this section, designated Roth account means
a designated Roth account as defined in A-1 of Sec. 1.402A-1.
Q-2. Can an eligible rollover distribution from a designated Roth
account be rolled over to a Roth IRA even if the distributee is not
otherwise eligible to make regular or conversion contributions to a
Roth IRA?
A-2. Yes. An individual may establish a Roth IRA and rollover an
eligible rollover distribution from a designated Roth account to that
Roth IRA even if such individual is not eligible to make regular
contributions or conversion contributions (as described in section
408A(c)(2) and (d)(3), respectively) because of the modified adjusted
gross income limits in section 408A(b)(3).
Q-3. For purposes of the ordering rules on distributions from Roth
IRAs, what portion of a distribution from a rollover contribution from
a designated Roth account is treated as contributions?
A-3. Under section 408A(d)(4), distributions from Roth IRAs are
deemed to consist first of regular contributions, then of conversion
contributions, and finally, of earnings. For purposes of section
408A(d)(4), the amount of a rollover contribution that is treated as a
regular contribution is the portion of the distribution that is treated
as investment in the contract under A-6 of Sec. 1.402A-1, and the
remainder of the rollover contribution is treated as earnings. Thus,
the entire amount of any qualified distribution from a designated Roth
account that is rolled over into a Roth IRA is treated as a regular
contribution to the Roth IRA. Accordingly, a subsequent distribution
from the Roth IRA in the amount of that rollover contribution is not
includible in gross income under the rules of A-8 of Sec. 1.408A-6.
Q-4. In the case of a rollover from a designated Roth account to a
Roth IRA, when does the 5-taxable-year period (described in section
408A(d)(2)(B) and A-1 of Sec. 1.408A-6) for determining qualified
distributions from a Roth IRA begin?
A-4. (a) The 5-taxable-year period for determining a qualified
distribution from a Roth IRA (described in section 408A(d)(2)(B) and A-
1 of Sec. 1.408A-6) begins with the earlier of the taxable year
described in A-2 of Sec. 1.408A-6 or the taxable year in which a
rollover contribution from a designated Roth account is made to a Roth
IRA. The 5-taxable-year period described in this A-4 and the 5-taxable-
year period of participation described in A-4 of Sec. 1.402A-1 are
determined independently.
(b) The following examples illustrate the application of this A-4--
Example 1. Employee D, who is over age 59\1/2\, takes a
distribution from D's designated Roth account in 2008, prior to the
end of the 5-taxable-year period of participation used to determine
qualified distributions from a designated Roth account. The
distribution is an eligible rollover distribution and D rolls it
over in accordance with sections 402(c) and 402A(c)(3) to D's Roth
IRA, which was established in 2003 (i.e., established for more than
5 years). Any subsequent distribution from the Roth IRA of the
amount rolled in, plus earnings thereon, would not be includible in
gross income (because it would be a qualified distribution within
the meaning of section 408A(d)(2)).
Example 2. Assume the facts are the same as in Example 1 except
that the Roth IRA is D's first Roth IRA and is established with the
rollover in 2008, which is the only contribution made to the Roth
IRA. If a distribution is made from the Roth IRA prior to the end of
the 5-taxable-year period used to determine qualified distributions
from a Roth IRA (which begins in 2008, the year of the rollover
which established the Roth IRA) the distribution would not be a
qualified distribution within the meaning of section 408A(d)(2), and
any amount of the distribution that exceeded the portion of the
[[Page 4331]]
rollover contribution that consisted of investment in the contract
is includible in D's gross income.
Example 3. Assume the facts are the same as in Example 2 except
that the distribution from the designated Roth account is after the
end of the 5-taxable-year period of participation used to determine
qualified distributions from a designated Roth account. If a
distribution is made from the Roth IRA prior to the expiration of
the 5-taxable-year period used to determine qualified distributions
from a Roth IRA, the distribution would not be a qualified
distribution within the meaning of section 408A(d)(2), and any
amount of the distribution that exceeded the amount rolled in is
includible in D's gross income.
Q-5. Can amounts distributed from a Roth IRA be rolled over to a
designated Roth account as defined in A-1 of Sec. 1.402A-1?
A-5. No. Amounts distributed from a Roth IRA may be rolled over or
transferred only to another Roth IRA and are not permitted to be rolled
over to a designated Roth account under a section 401(a) or section
403(b) plan. The same rule applies even if all the amounts in the Roth
IRA are attributable to a rollover distribution from a designated Roth
account in a plan.
Q-6. When is this Sec. 1.408A-10 applicable?
A-6. The rules of Sec. 1.408A-10 apply for taxable years beginning
on or after January 1, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E6-945 Filed 1-25-06; 8:45 am]
BILLING CODE 4830-01-P