In-Plan Roth conversions

[Guest Holly Foster]

Some employers want to limit the availability of In-Plan Roth conversions to only active employee’s eligibility for in-service distributions. The reason for this is that once terminated employees move their funds to Roth, they are more likely to leave the balance in the plan for at least 5 years to get the tax advantages and it could be difficult to find terminated participants 5 or more years later.

In the latest newsletter from Sal Tripodi, he seemed to indicate there would be an issue if a terminated employee's balance was over $5,000 and couldn't be forced out, but wanted to roll the account within the plan to the Roth and was not permitted the same right, it would be "like the participant would be forced out" because taking the balance out of the plan would be the only way the participant could get the funds converted. Also may create a benefits, rights, and feature issue? Is anyone else doing In-Plan Roth conversions and if so are you limiting the availability to active employees eligible for distribution?

[mbozek]

Some employers want to limit the availability of In-Plan Roth conversions to only active employee’s eligibility for in-service distributions. The reason for this is that once terminated employees move their funds to Roth, they are more likely to leave the balance in the plan for at least 5 years to get the tax advantages and it could be difficult to find terminated participants 5 or more years later.

In the latest newsletter from Sal Tripodi, he seemed to indicate there would be an issue if a terminated employee's balance was over $5,000 and couldn't be forced out, but wanted to roll the account within the plan to the Roth and was not permitted the same right, it would be "like the participant would be forced out" because taking the balance out of the plan would be the only way the participant could get the funds converted. Also may create a benefits, rights, and feature issue? Is anyone else doing In-Plan Roth conversions and if so are you limiting the availability to active employees eligible for distribution?

IRS Rev. rul 96-47 prohibits limiting investment alternatives available to terminated participants because the limitation on investment alternatives imposes a significant detriment on the participant which prevent the employee from giving valid consent to a distribution over 5,000.

[masteff]

IRS Rev. rul 96-47 prohibits limiting investment alternatives available to terminated participants because the limitation on investment alternatives imposes a significant detriment on the participant which prevent the employee from giving valid consent to a distribution over 5,000.

A Roth account is not an investment option so RR96-47 wouldn't apply.

[mbozek]

IRS Rev. rul 96-47 prohibits limiting investment alternatives available to terminated participants because the limitation on investment alternatives imposes a significant detriment on the participant which prevent the employee from giving valid consent to a distribution over 5,000.

A Roth account is not an investment option so RR96-47 wouldn't apply.

It is an investment option b/c not not allowing the Roth option to terminated participants limits their investment choices to pre tax funds which will result in a different value than an after tax investment. The significiant detriment to giving valid consent provision of the regs cited in RR 96-47 is applicable to more than just investment alternatives and applies to any restiction imposed on a participant who does not consent to a distribution as determined by the IRS after examining the "the particular facts and circumstances".