Integrating Deemed Roth IRAs into 401k Plans

[Guest johnpetrancosta]

I've been researching Deemed Roth IRAs under employer retirement plans and need to verify two points, one of which just doesn't smell right. I have also posted this query under IRAs, but have not yet received a response.

1. The internet tax research network we use states ... However, the deemed IRA accounts are not subject to the ERISA reporting and disclosure, participation, vesting, funding and enforcement requirements applicable to the eligible retirement plan.

This would seem to imply that an employer can create deemed Roth IRAs for only a select group of individuals - i.e. only the HCEs or owners or officers. This does not pass my smell test. Does anyone have any insights on this?

2. Regular Roth IRAs have an AGI phase out. The research I've read seems somewhat vague regarding Deemed Roth IRAs. It states ... For 2005, the dollar limitation will generally be $4,000, plus an additional $500 for participants over 50. The maximum contribution cannot exceed the employee's includible compensation for the year. - It never specifically references and AGI phase out, however it previously states that the deemed Roth IRA must meet the requirements of 408A (which is where the AGI phase out is found) and also states Deemed Roth IRAs are subject the same contribution limits as regular Roth IRAs.

Any thoughts on whether the phase-outs apply to Deemed Roth IRAs?

[Guest johnpetrancosta]

I found the second part of my question, the AGI phase out rules do apply.

[ljr]

Since Roth IRA's are part of the plan, I don't see how they can be carved out from the usual treatment of qualified plan money. I've read a lot of articles on this topic and this was never mentioned. You are correct - fails the smell test!

[Guest johnpetrancosta]

The articles and research I've read goes to great length to explain that the qualified plan and Deemed Roth IRAs are to be treated as separate entities, with issues regarding eligibility, participation, disclosure, nondiscrimination, contributions, distributions, investments and plan administration each resolved under separate rules. Therefore, I'm reasonable certain there can be different eligibility requirements. The question remain do the participation and eligibility requirememnt concerning the Deemed Roth IRA have to be nondiscriminatory. I have read conflicting statements regarding this issue.

[mbozek]

See IRS pub 590 P3 & 52 and reg 1.408(q)-1. Deemed IRA is subject only to IRA rules, not 401(a) rules.

[Guest johnpetrancosta]

Thanks you both for replying. I had not previously read Pub 590. I've found nothing in Pub 590 or 1.408(q)-1 that would prohibit an employer from establishing a Deemed Roth IRA and including only him/herself. Would you agree mbozek? I apologize for beating a dead horse, but I just don't trust my read on this.

[Alf]

Because of the AGI limits, this question doesn't come up. Do you really have an HCE who is eligible for Roths?

[Guest johnpetrancosta]

Sure, we're talking Roth IRAs - MFJ with non working spouse. Also, owners not taking much comp. Owners children on the payroll. I hadn't previously done any reading on Deemed Roth IRAs when my client asked this question. Before starting the research, my initial reaction was you have to be nondicriminatory. I kept digging and found nothing prohibiting selecting a select group in a discriminatory manner. It's just such a divergence from what I expected, I figured I must be missing something - either obscure or obvious.

[rcline46]

Better look again. Anyone telling you deemed IRA rules is reading from the wrong book. The ROTH 401(k) rules ARE different. YOu need to go to the regulations 1.401(k)-1 etc and check the rules.

[mbozek]

What 401k regs are your referring to for Roth contributions?See Reg. 1.401(k)-1(f) special rules for Roth Contributions [reserved]

[rcline46]

Oh dear Mbozek! No longer reserved!!! Roth 401(k) regs have been released are are effective for plan years beginning after 12/31/05!

Subject to ADP testing, same distribution restrictions as rest of plan, including RMDs, earnings taxable in first 5 years AND if not a 'qualifying distribution.' Participant chooses split between k and ROTH contributions, separate accounting, funny things happen on give backs.

That is why johnpetrancosta must review the releases on ROTH 401(k) from reputable sources, like the IRS. Trade rags ALWAYS get it wrong! www.irs.gov/ep and get it from the SOURCE john!

[Guest johnpetrancosta]

Was I just insulted? - admittedly I'm not very familiar with Deemed Roth IRAs and/or Roth 401k, but I did read 1.408(q)-1, which is where I got most of my information prior to posting my query, I assumed that was from the source.

I admit to being very confused now - is there a distinction between Deemed Roth IRAs under 1.408(q)-1 and Roth 401(k)s under 1.401(k)-1? Are we talking two separate animals or are they the same thing and now being covered under 1.401(k)-1 for plan years beginning after 12/31/05.

[Belgarath]

I think John is right, and that the discussion got sidetracked onto Roth 401(k), which is not the same thing as deemed IRA's. Under 1.408(q)-1(f)(6), the availability of a deemed IRA is not a "benefit, right or feature" so isn't subject to nondiscrimination testing for availability.

However, when I was reading the model amendment that the IRS did in Rev. Proc. 2003-13, I notice that Section 2 refers to "Each Participant" - so you'd have to use custom language in your document rather than simply adopting the model amendment.

We have no intention of messing with deemd IRA's anyway, so fortunately I don't have to worry about this garbage!

[rcline46]

And the language can get you confused.

There is a 'deemed IRA' available in a 401(k) plan. Need amendment to plan, corporate trustee qualfied to handle IRA accounts, and that is about it.

There is no such animal as a 'deemed Roth IRA'.

Then there is the Roth 401(k) which I was discussing and which I admit that I assumed John was talking about.

[Belgarath]

Rcline - I respectfully disagree. The deemed IRA can be either a "regular" IRA or a ROTH. See Section 2 of the IRS model amendment from Rev. Proc 2003-13 for a quick confirmation of this.

P.S. - here's a copy of the language.

REV-PROC, PEN-RUL 17,299Q-61, Rev. Proc. 2003-13, I.R.B. 2003-4, January 27, 2003.

SECTION ___. DEEMED IRAs

1. Applicability and effective date. This section shall apply if elected by the employer in the adoption agreement and shall be effective for plan years

beginning after the date specified in the adoption agreement.

2. Deemed IRAs. Each participant may make voluntary employee contributions to the participant's ___[insert “traditional” or “Roth”] IRA under the plan.

The plan shall establish a separate ___[insert “account” or “annuity”] for the designated IRA contributions of each participant and any earnings properly

allocable to the contributions, and maintain separate recordkeeping with respect to each such IRA.

3. Reporting duties. The ___[insert “trustee” or “issuer”] shall be subject to the reporting requirements of section 408(i) of the Internal Revenue Code with

respect to all IRAs that are established and maintained under the plan.

4. Voluntary employee contributions. For purposes of this section, a voluntary employee contribution means any contribution (other than a mandatory

contribution within the meaning of section 411©(2) of the Code) that is made by the participant and which the participant has designated, at or prior to the

time of making the contribution, as a contribution to which this section applies.

5. IRAs established pursuant to this section shall be held in ___[insert “a trust” or “an annuity”] separate from the trust established under the plan to hold

contributions other than deemed IRA contributions and shall satisfy the applicable requirements of sections 408 and 408A of the Code, which requirements

are set forth in section ___[insert the section of the plan that contains the IRA requirements].

(Adoption agreement provisions)

Section ___of the plan, Deemed IRAs: (check one)

___ shall be effective for plan years beginning after December 31, ___(enter a year later than 2001).

___ shall not apply.

[Locust]

A deemed Roth IRA within a 401(k) plan is possible, but why would a 401(k) plan sponsor want it or allow it? If the owner or an employee wants a Roth IRA, he or she should simply set one up outside the plan. Adding it to the 401(k) Plan is too complicated and will be regretted.

On the other hand a Roth contribution to a 401(k) plan makes sense - because the owner gets the benefit even if he weren't eligible for a Roth IRA. However, a Roth contribution to a 401(k) plan is subject to the same rules as elective contributions, and that is what the 401(k) regs are all about.

[Alf]

Wow. Lots of confusion here?

Deemed Roths are ok. The are not a BRF, but this may be just a pass on the 401(a)(4) current availability requirement so employers don't have to worry about actual overall usage of the Roth feature. I don't think ADP applies and assume that everyone (including me) is getting these confused with the Roth 401(k)s that will be available in 2006. From wha tI understand to be the law, you should be able to use deemed IRAs in the family situation described in the original post.

[Guest johnpetrancosta]

Thank you everyone. I greatly appreciate your responses.