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Few Employers to Offer In-Plan Roth Conversions Before 2012

By Stephen Miller  12/15/2010
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Update: 'Fiscal Cliff' Law Eases Roth 401(k) Transfers

On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8), which was signed into law the following day. The legislation permits participants in pretax 401(k)s, 403(b)s and similar defined contribution retirement plans to elect to transfer amounts to a designated Roth 401(k) account, if available in their plan, at any time, with the transfer treated as a taxable qualified rollover contribution. While participants must pay income tax on funds transferred to the Roth 401(k) account, disbursements from the Roth account paid during their retirement years are made tax-free.

Employers must amend their plans to first allow for in-plan Roth 401(k) conversions.

Previously, converting funds from a pretax to a Roth 401(k) account was limited to money that was already "distributable" without penalty from the pretax plan—typically when an employee reached age 59½ or terminated employment, unless the plan otherwise allowed in-service distributions.

See "'Fiscal Cliff' Law Affects Payroll Tax Withholding and Employee Benefits."

A 2010 law gives employees the option of paying taxes on their retirement plan balances during their working years if their employers amend their plans to let them do so. Yet less than one-third of employers surveyed by Mercer said they will offer the in-plan Roth conversion feature before 2012, and 45 percent say they have no plans to offer it.

Mercer's In-plan Roth Conversion Survey, conducted during October and November 2010, asked U.S. defined contribution plan sponsors about their interest in allowing in-plan Roth conversions, made available through the Small Business and Infrastructure Jobs Tax Act signed into law in September 2010 (see " Roth Conversions Within 401(k) Plans Now Permitted".) Just 31 percent of survey respondents say they plan to allow Roth conversions by the end of 2011, and 24 percent more plan to add the feature at some point.

Timeframe for adding in-plan Roth conversion

No plans to add


Plan to add in future


Plan to add by Dec. 31, 2010


Plan to add in 2011


Source: Mercer LLC

Among those employers who plan to wait, the majority said they will:

See whether participants express interest (37 percent).

Determine when recordkeepers will be ready to administer the feature (34 percent).

See what other plan sponsors will do (23 percent).

“In-plan Roth conversions provide sponsors an opportunity to enhance their plans to benefit participants for little or no cost,” said Amy Reynolds, a partner in Mercer’s retirement, risk and finance business. “While employers are understandably hesitant to take the plunge with outstanding administrative questions, we expect interest to increase over time.”

Only Moderate Interest, So Far

In a Roth defined contribution plan, employees can contribute on an after-tax basis and distributions at retirement will be tax free, provided that certain conditions are met. Roth conversions are thus most attractive to those who expect to be subject to greater taxation when they retire than they are during their working years.

Because the new law allowing for in-plan Roth conversions became effective immediately and with the possibility that federal income tax rates might rise in the future, many retirement industry observers expected that highly paid employees would demand that this feature be made available. However, Mercer’s survey shows only moderate employee interest in the feature:

More than half (54 percent) of the plan sponsors indicated that employees have not asked about in-plan Roth conversions.

Of the sponsors whose employees have expressed interest, 53 percent have heard from highly compensated employees, 37 percent from executives and 33 percent from older employees or those with large accounts.

Just 21 percent of surveyed employers have heard from rank-and-file employees about in-Roth conversions.

“For in-plan Roth conversions to truly provide value, sponsors cannot just amend their plans and their processes. Participants must be educated about Roth and tax implications in general—which can be a particularly challenging task for employers,” said Reynolds.

Related Articles—SHRM:

IRS Issues Guidance on Roth 401(k) Conversions, SHRM Online Benefits Discipline, December 2010

Roth Conversions within 401(k) Plans Now Permitted, SHRM Online Benefits Discipline, September 2010

Related Articles—External:

Further IRS Guidance Regarding In-Plan Roth Conversions Leaves Questions Unanswered, Ford & Harrison LLP, December 2010

Stephen Miller is an online editor/manager for SHRM.

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