Designated Roth Accounts Under Section 402A, 4320-4331 [E6-945]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 17 (Thursday, January 26, 2006)]
[Proposed Rules]
[Pages 4320-4331]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-945]


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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 https://
www.irs.gov/regs, or via the Federal eRulemaking Portal at https://
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 descr