Can Roth 401(k) Elections Be "All or Nothing"?

[Guest Grumpy456]

The final Roth 401(k) regs make it clear that a 401(k) plan that wishes to add the Roth option must allow participants to make both pre-tax 401(k) contributions and Roth 401(k) contributions, but this requirement could mean two different things:

1. At any point in time, a participant may make either pre-tax 401(k) contributions or Roth 401(k) contributions (but not both); or

2. At any point in time, a participant may make some pre-tax 401(k) contributions and some Roth 401(k) contributions.

The first interpretation works if the requirement is that over the course of the plan year a participant must be allowed to make both pre-tax 401(k) contributions and Roth 401(k) contributions. The second interpretation works if the requirement is that as of any given deferral a participant must be allowed to make both pre-tax 401(k) contributions and Roth 401(k) contributions. I don't know which interpretation is correct, but a need has arisen to resolve this issue.

One of my clients has been told by their lawyer that it is OK to implement the Roth 401(k) rules so that at any point in time, a participant has the option to either make a 100% pre-tax 401(k) contribution or a 100% Roth contribution, but that the plan does not have to give the participant the option of designating, for example, 40% of their deferral as pre-tax and the remainder as Roth. The lawyer obviously thinks that the first interpretation is correct. Has anyone else thought about whether the requirement in the regs supports the lawyer's position? Does anyone think the lawyer's position is unreasonable?

Thanks in advance for any help!

[Belgarath]

I agree with the lawyer. The plan must offer both pre-tax and Roth in order to offer Roth, but the plan may require an election of 100% to one or the other, or may choose to allow a split.

FWIW - most folks I've talked to who are going to handle Roth K plans are going to have the split option available, and most of them think their clients will choose this option.

[Guest mjb]

Under IRC 402A(b)(1) a qualified Roth contribution means a program under which an employee may elect to make designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make under the 401k plan. I dont see anything in the statute that allows the employer or plan to require the employee to choose between all pre tax or all roth. Ask the lawyer how his opinion is consistent with the statute.

[Belgarath]

I interpret it exactly opposite. Since the statute and regs do not specify that the employer must allow a split election, then the plan can be written to restrict it. 1.401(k)-1(f)(1) provides that a designated Roth contribution is an elective contribution that, to the extent permitted by the plan ....etc.

I take this to mean that since there is no specific overriding requirement to allow a split election, that an all or nothing restriction is perfectly permissible.

I'll be interested to see what others think on this subject.

[Guest mjb]

B: Q What section of 402A are you reading from which does not authorize a split election? A regulation cannot contradict a statutory provision that expressly states that the employee may elect to contribute all or any portion of his elective deferrals to a roth account. The "to the extent permitted by the plan" language refers to the provisions that a plan may have under the 401k regs regarding elections, e.g., frequency of changing elections, % of comp that can be deferred, etc and cannot be construed to permit a limitation on an employee'r right to divide his contribution between roth and non roth accounts which is authorized by the IRC.

This is a question that should be asked at the next professional meeting where the IRS officials are present along with the question of whether the look back comp amount under 401(a)(17) is 100k in 2006 as stated by the IRS.

[stephen]

mjb - I see you are still trying to find someone else to join you in your line of thinking for determining HCEs: HCE Thread

Good luck with that-

Perhaps an ASPPA member will submit the Split Roth question to be asked as a Q&A but I don't know if you'll find anyone to submit the other one as it seems we all agree with the many sources that say for 2006 HCE determination you look back to 2005 and see who made more than $95,000 in 2005.

[Guest mjb]

Stephen : what is your opinion on whether the final roth regs permit the plan to require that the employee elect either 100% tax deferrd or 100% roth and the basis for your conclusion?

[stephen]

mjb - On the split deferral idea based on what little I know on this topic I agree with your opinion that it seems the intent is to allow it to be a split option.

It seems odd to me that an employer would want to limit contributions to Roth or Non Roth as they are being deposited since the plan that allows for Roth Salary Deferrals has to allow for regular Salary Deefrrals. Since the recordkeeping system and payroll system would have to accomodate both why not allow for a split contribution all of the time.

[Guest Grumpy456]

Thanks for the comments. My inclination, I don't know why, was that the lawyer was taking an aggressive position with respect to split elections--i.e., they may be prohibited by the plan sponsor. I won't go so far as to say that the lawyer is wrong.

The definition of a "designated Roth contribution" in the final regulations unfortunately doesn't (but should) answer the question definitively one way or the other. That definition includes, in part, the following statement (which mjb has hit upon):

"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 that is being made in lieu of all or a portion of the pre-tax elective contributions the employee is otherwise eligible to make under the

plan;"

Does the phrase "to the extent permitted under the plan", as Belgarath suggests, permit the plan sponsor to deny a split election option to participants without violating the phrase "that is being made in lieu of all or a portion of the pre-tax elective contributions the employee is otherwise eligible to make"? We would all agree, I suspect, that the phrase "or a portion" means less than 100%. There is obviously not complete agreement, however, with respect to whether "less than 100%" applies to the election itself (if so, then split elections must be permitted) or rather to the deferrals that otherwise would have been made over the course of the plan year (in which case split elections may be prohibited).

Do Belgarath and practitioners that accept the split-election-as-not-required approach think it is a clear and convincing position or simply a position that, given the text of the guidance, is reasonable?

[Guest mjb]

That is precisely the Q- what does the employer gain by limiting elections to all deferred or all Roth since there must be separate systems for allocating each type of contribution among plan investments and the amounts must be accounted for separately in tax reporting.

[Tom Poje]

Can my plan offer only designated Roth contributions?

No, in order to provide for designated Roth contributions, a 401(k) or 403(b) plan must also offer pre-tax elective contributions

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Can I make both pre-tax elective and designated Roth contributions in the same year?

Yes, you can make contributions to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose. However, the combined amount contributed in any one year is limited by the 402(g) limit - $15,000 for 2006 (plus an additional $5,000 in catch-up contributions if age 50 or older).

......................

These are from the IRS Q and A on Roth

http://www.irs.gov/retirement/article/0,,id=152956,00.html

those seem pretty clear. hope that helps

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A blessed and Happy Easter to all!!!

[Kevin C]

Why would you want to do this even if it is allowed under the current regs? It's easy for a participant to get around it. All they have to do is change their election during the year. I defer as Roth for the first six months and then change to regular for the remainder of the year. Then my deferrals for the year are split 50/50 between Roth and regular. The only difference between this and allowing a split election is that payroll will have to process more deferral election change forms.

We are allowing split elections for all of our clients that chose to allow Roth deferrals. I can't imagine going to the trouble to add a Roth feature, then severely restricting the participants' ability to take advantage of it.

[stephen]

Or worse if the plan allows for more frequent election changes to elections the participant could change as often as each payroll period Roth, then non-roth etc.

[Guest Grumpy456]

The reason the lawyer has suggested the all or nothing approach is that he believes that approach is likely to cause fewer communication snafus between participants and plan sponsors. Whether it will or not, who knows. I agree with you that from a plan administrator's viewpoint, putting 100% of a deferral in Source #1 (pre-tax deferrals) and 0% in Source #2 (Roth deferrals) is no more difficult than putting 12% in Source #1 and 88% in Source #2.

[Belgarath]

MJB - we'll just have to agree to disagree. Certainly, you may be right and I'm wrong. I most definitely agree that this question should be specifically addressed by the IRS.

I just don't read the reg as contradicting the statute. 402(A)(b)(1), as you mention, refers to a program under which an employee may elect to make "designated Roth contributions..."

402A©(1) defines a designated contribution. And 1.401(k)-1(f) further defines or clarifies (or maybe confuses) what a "designated contribution" is. I don't read the "all or nothing" approach as being inconsistent with the regulation - that is, IF THE PLAN PERMITS a split election, then the employee can designate all or a portion to Roth or pre-tax. I read the only specific requirement to be that a plan cannot offer only Roth.

Anyway, will be interesting to see what the IRS says on this. Perhaps I'll be lunching on crow - a longtime favorite of mine.

[austin3515]

in lieu of all OR A PORTION of the pre-tax elective contributions the employee is otherwise eligible to make under the plan.

Where's the ambiguity? That's super aggressive to interpret that to mean all or none, IMHO...