Designated Roth Contributions to Cash or Deferred Arrangements Under Section 401(k), 10062-10066 [05-4020]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 40 (Wednesday, March 2, 2005)]
[Proposed Rules]
[Pages 10062-10066]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-4020]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-152354-04]
RIN 1545-BE05


Designated Roth Contributions to Cash or Deferred Arrangements 
Under Section 401(k)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments to the regulations 
under section 401(k) and (m) of the Internal Revenue Code. These

[[Page 10063]]

proposed regulations would provide guidance concerning the requirements 
for designated Roth contributions to qualified cash or deferred 
arrangements under section 401(k). These proposed regulations would 
affect section 401(k) plans that provide for designated Roth 
contributions and participants eligible to make elective contributions 
under these plans.

DATES: Written or electronic comments and requests for a public hearing 
must be received by May 31, 2005.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-152354-04), 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-
152354-04), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the IRS Internet site at https://
www.irs.gov/regs or the Federal eRulemaking Portal at https://
www.regulations.gov (indicate IRS and REG-152354-04).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, R. Lisa 
Mojiri-Azad or Cathy A. Vohs, 202-622-6060; concerning submissions and 
requests for a public hearing, contact Treena Garrett, 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 May 2, 2005. 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 1.401(k)-1(f)(1)&(2). This information is required to comply with 
the separate accounting and recordkeeping requirements of section 402A. 
This information will be used the IRS and employers maintaining section 
401(k) plans 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: 157,500 hours.
    Estimated average annual burden hours per recordkeeper: 1 hour.
    Estimated number of respondents recordkeepers: 157,500.
    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 amendments to the Income Tax 
Regulations (26 CFR Part 1) under section 401(k) and (m) of the 
Internal Revenue Code of 1986 (Code). The amendments would provide 
guidance on designated Roth contributions under section 402A of the 
Code, added by section 617(a) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (Public Law 107-16, 115 Stat. 38) (EGTRRA).
    Section 401(k) provides that a profit-sharing, stock bonus, pre-
ERISA money purchase or rural cooperative plan will not fail to qualify 
under section 401(a) merely because it contains a cash or deferred 
arrangement. Contributions made at the election of an employee under a 
qualified cash or deferred arrangement are known as elective 
contributions. Generally, such elective contributions are not 
includible in income at the time contributed and are sometimes referred 
to as pre-tax elective contributions.
    Under section 402A, beginning in 2006, a plan may permit an 
employee who makes elective contributions under a qualified cash or 
deferred arrangement to designate some or all of those contributions as 
Roth contributions. Although designated Roth contributions are elective 
contributions under a qualified cash or deferred arrangement, unlike 
pre-tax elective contributions, they are currently includible in gross 
income. However, a qualified distribution of designated Roth 
contributions is excludable from gross income.
    On December 29, 2004, final regulations under section 401(k) were 
issued (69 FR 78144). Those regulations apply to plan years beginning 
on or after January 1, 2006. Under those final regulations, Sec.  
1.401(k)-1(f) was reserved for special rules for designated Roth 
contributions. These proposed regulations would amend those final 
regulations to fill in that reserved paragraph and provide additional 
rules applicable to designated Roth contributions.

Explanation of Provisions

Rules Relating to Designated Roth Contributions

    The proposed regulations provide special rules relating to 
designated Roth contributions under a section 401(k) plan. The proposed 
regulations would amend Sec.  1.401(k)-1(f) to provide a definition of 
designated Roth contributions and special rules with respect to such 
contributions. Under these proposed regulations, designated Roth 
contributions are defined as elective contributions under a qualified 
cash or deferred arrangement that are: (1) Designated irrevocably by 
the employee at the time of the cash or deferred election as designated 
Roth contributions; (2) treated by the employer as includible in the 
employee's income at the time the employee would have received the 
contribution amounts in cash if the employee had not made the cash or 
deferred election (e.g., by treating the contributions as wages subject 
to applicable withholding requirements);

[[Page 10064]]

and (3) maintained by the plan in a separate account. The proposed 
regulations provide that contributions may only be treated as 
designated Roth contributions to the extent permitted under the plan.
    The proposed regulations provide that, under the separate 
accounting requirement, contributions and withdrawals of designated 
Roth contributions must be credited and debited to a designated Roth 
contribution account maintained for the employee who made the 
designation and the plan must maintain a record of the employee's 
investment in the contract (i.e., designated Roth contributions that 
have not been distributed) with respect to the employee's designated 
Roth contribution account. In addition, gains, losses, and other 
credits or charges must be separately allocated on a reasonable and 
consistent basis to the designated Roth contribution account and other 
accounts under the plan. However, forfeitures may not be allocated to 
the designated Roth contribution account. The separate accounting 
requirement applies at the time the designated Roth contribution is 
contributed to the plan and must continue to apply until the designated 
Roth contribution account is completely distributed.

Other Rules

    A designated Roth contribution must satisfy the requirements 
applicable to elective contributions made under a qualified cash or 
deferred arrangement. Thus, designated Roth contributions are subject 
to the nonforfeitability and distribution restrictions applicable to 
elective contributions and are taken into account under the ADP test of 
section 401(k) in the same manner as pre-tax elective contributions. 
Similarly, designated Roth contributions are subject to the rules of 
section 401(a)(9)(A) and (B) in the same manner as pre-tax elective 
contributions.
    Section 1.401(k)-2 of the final section 401(k) regulations contains 
correction methods that a plan may use if it fails to satisfy the ADP 
test for a year. The proposed regulations would amend the rules 
relating to these correction methods to permit an HCE with elective 
contributions for a year that includes both pre-tax elective 
contributions and designated Roth contributions to elect whether excess 
contributions are to be attributed to pre-tax elective contributions or 
designated Roth contributions.
    The proposed regulations provide that a distribution of excess 
contributions is not includible in income to the extent it represents a 
distribution of designated Roth contributions. However, the income 
allocable to a corrective distribution of excess contributions that are 
designated Roth contributions is includible in gross income in the same 
manner as income allocable to a corrective distribution of excess 
contributions that are pre-tax elective contributions. The proposed 
regulations also provide a similar rule under the correction methods 
that a plan may use if it fails to satisfy the ACP test in Sec.  
1.401(m)-2.

Additional Required Plan Terms

    In addition to the rules relating to section 401(k) and (m) 
discussed above, there are other aspects of designated Roth 
contributions that must be reflected in plan terms and are not 
addressed in these proposed regulations. For example, while a plan is 
permitted to allow an employee to elect the character of a distribution 
(i.e., whether the distribution will be made from the designated Roth 
contribution account or other accounts), the extent to which a plan so 
permits must be set forth in the terms of the plan. In addition, the 
plan must provide that, for purposes of section 401(a)(31), designated 
Roth contributions may be rolled over only to another plan maintaining 
a designated Roth contribution account or to a Roth IRA.

Certain Issues Not Addressed

    These proposed regulations do not provide guidance with respect to 
the taxation of the distribution of designated Roth contributions. For 
example, the proposed regulations do not provide guidance with respect 
to the recovery of an employee's investment in the contract associated 
with his or her designated Roth contributions. The IRS and Treasury 
request comments on the issues on which guidance is needed with respect 
to the taxation of such distributions. Comments are also requested on 
any other issues arising under section 402A on which guidance is 
needed.

Effective Date

    Section 402A is effective for taxable years beginning after 
December 31, 2005. These regulations are proposed to apply to plan 
years beginning on or after January 1, 2006.

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 is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that most small 
entities that maintain a section 401(k) plan use a third party provider 
to administer the plan. Therefore, an analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, 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 Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury request comments on the clarity of the proposed 
rules and how they can 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 proposed regulations are R. Lisa 
Mojiri-Azad and Cathy A. Vohs of the Office of the Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However, 
other personnel from the IRS and Treasury participated in the 
development of these regulations.

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 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.401(k)-0 is amended by:
    1. The entry for Sec.  1.401(k)--1(f) is amended by removing 
``[Reserved]'' and adding entries for Sec.  1.401(k)-1(f)(1),(2) and 
(3).
    2. Adding an entry for Sec.  1.401(k)-2(b)(2)(vi)(C).
    The additions read as follows:

[[Page 10065]]

Sec.  1.401(k)-0  Table of contents.

* * * * *


Sec.  1.401(k)-1  Certain cash or deferred arrangements.

* * * * *
    (f) * * *
    (1) In general.
    (2) Separate accounting required.
    (3) Designated Roth contributions must satisfy rules applicable to 
elective contributions.
* * * * *


Sec.  1.401(k)-2  ADP test.

* * * * *
    (b) * * *
    (2) * * *
    (vi) * * *
    (C) Corrective distributions attributable to designated Roth 
contributions.
* * * * *
    Par. 3. Section 1.401(k)-1(f) is revised as follows:


Sec.  1.401(k)-1  Certain cash or deferred arrangements.

* * * * *
    (f) Special rules for designated Roth contributions--(1) In 
general. The term designated Roth contribution means an elective 
contribution under a qualified cash or deferred arrangement that, to 
the extent permitted under the plan, is--
    (i) Designated irrevocably by the employee at the time of the cash 
or deferred election as a designated Roth contribution;
    (ii) Treated by the employer as includible in the employee's income 
at the time the employee would have received the amount in cash if the 
employee had not made the cash or deferred election (e.g., by treating 
the contributions as wages subject to applicable withholding 
requirements); and
    (iii) Maintained by the plan in a separate account (in accordance 
with paragraph (f)(2) of this section).
    (2) Separate accounting required. Under the separate accounting 
requirement of this paragraph (f)(2), contributions and withdrawals of 
designated Roth contributions must be credited and debited to a 
designated Roth contribution account maintained for the employee who 
made the designation and the plan must maintain a record of the 
employee's investment in the contract (i.e., designated Roth 
contributions that have not been distributed) with respect to the 
employee's designated Roth contribution account. In addition, gains, 
losses, and other credits or charges must be separately allocated on a 
reasonable and consistent basis to the designated Roth contribution 
account and other accounts under the plan. However, forfeitures may not 
be allocated to the designated Roth contribution account. The separate 
accounting requirement applies at the time the designated Roth 
contribution is contributed to the plan and must continue to apply 
until the designated Roth contribution account is completely 
distributed.
    (3) Designated Roth contributions must satisfy rules applicable to 
elective contributions. A designated Roth contribution must satisfy the 
requirements applicable to elective contributions made under a 
qualified cash or deferred arrangement. Thus, for example, a designated 
Roth contribution must satisfy the requirements of paragraphs (c) and 
(d) of this section and is treated as an employer contribution for 
purposes of sections 401(a), 401(k), 402, 404, 409, 411, 412, 415, 416 
and 417. In addition, the designated Roth contributions are treated as 
elective contributions for purposes of the ADP test. Similarly, the 
designated Roth contribution account is subject to the rules of section 
401(a)(9)(A) and (B) in the same manner as an account that contains 
pre-tax elective contributions.
* * * * *
    Par. 4. Section 1.401(k)-2 is amended as follows:
    1. A new sentence is added after the second sentence in paragraph 
(b)(1)(ii).
    2. The last sentence in paragraph (b)(2)(vi)(B) is amended by 
removing the period and adding a clause at the end.
    3. Paragraph (b)(2)(vi)(C) is added.
    The additions read as follows:


Sec.  1.401(k)-2  ADP test.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * * Similarly, a plan may permit an HCE with elective 
contributions for a year that includes both pre-tax elective 
contributions and designated Roth contributions to elect whether the 
excess contributions are to be attributed to pre-tax elective 
contributions or designated Roth contributions. * * *
* * * * *
    (2) * * *
    (vi) * * *
    (B) * * * , except to the extent provided in paragraph 
(b)(2)(vi)(C) of this section.
    (C) Corrective distributions attributable to designated Roth 
contributions. Notwithstanding paragraphs (b)(2)(vi)(A) and (B) of this 
section, a distribution of excess contributions is not includible in 
gross income to the extent it represents a distribution of designated 
Roth contributions. However, the income allocable to a corrective 
distribution of excess contributions that are designated Roth 
contributions is included in gross income in accordance with paragraph 
(b)(2)(vi)(A) or (B) of this section (i.e., in the same manner as 
income allocable to a corrective distribution of excess contributions 
that are pre-tax elective contributions).
* * * * *
    Par. 5. Section 1.401(k)-6 is amended as follows:
    1. A new definition is added after the definition of Current year 
testing method.
    2. A new definition is added after the definition of Pre-ERISA 
money purchase pension plan.
    The additions read as follows:


Sec.  1.401(k)-6  Definitions.

* * * * *
    Designated Roth contributions. Designated Roth contributions means 
designated Roth contributions as defined in Sec.  1.401(k)-1(f)(1).
* * * * *
    Pre-tax elective contributions. Pre-tax elective contributions 
means elective contributions under a qualified cash or deferred 
arrangement that are not designated Roth contributions.
* * * * *
    Par. 6. Section 1.401(m)-0 is amended by adding an entry for Sec.  
1.401(m)-2(b)(2)(vi)(C) to read as follows:


Sec.  1.401(m)-0  Table of contents.

* * * * *


Sec.  1.401(m)-2  ACP test.

* * * * *
    (b) * * *
    (1) * * *
    (vi) * * *
    (C) Corrective distributions attributable to designated Roth 
contributions.
* * * * *
    Par. 7. Section 1.401(m)-2 is revised as follows:
    1. The last sentence in paragraph (b)(2)(vi)(B) is amended by 
removing the period and adding a clause.
    2. Paragraph (b)(2)(vi)(C) is added.
    The additions read as follows:


Sec.  1.401(m)-2  ACP test.

* * * * *
    (b) * * *
    (2) * * *
    (vi) * * *
    (B) * * * or as provided in paragraph (b)(2)(vi)(C) of this 
section.
    (C) Corrective distributions attributable to designated Roth

[[Page 10066]]

contributions. Notwithstanding paragraphs (b)(2)(vi)(A) and (B) of this 
section, a distribution of excess aggregate contributions is not 
includible in gross income to the extent it represents a distribution 
of designated Roth contributions. However, the income allocable to a 
corrective distribution of excess aggregate contributions that are 
designated Roth contributions is taxed in accordance with paragraph 
(b)(2)(vi)(A) or (B) of this section (i.e., in the same manner as 
income allocable to a corrective distribution of excess aggregate 
contributions that are not designated Roth contributions).
* * * * *
    Par. 8. Section 1.401(m)-5 is amended by adding a new definition 
after the definition of Current year testing method to read as follows:
    The addition reads as follows:


Sec.  1.401(m)-5  Definitions.

* * * * *
    Designated Roth contributions. Designated Roth contributions means 
designated Roth contributions as defined in Sec.  1.401(k)-1(f)(1).
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-4020 Filed 3-1-05; 8:45 am]
BILLING CODE 4830-01-P