How do you allocate a distribution between Roth and non-Roth amounts?

[Peter Gulia]

I’d like to learn more about what TPAs and recordkeepers do in processing distributions under a retirement plan that includes Roth and non-Roth amounts.

Do you permit a participant (or a beneficiary) to specify his or her preference on which portion of a distribution is taken from Roth amounts?

Do you require a claimant to direct an allocation between Roth and non-Roth amounts?

For example, I have a client that’s considering whether its plan documents should specify that a claim will be denied unless the claim specifies the claimant’s allocation between Roth and non-Roth amounts.

If a participant isn’t permitted or fails to specify a preference, what ordering rule do you use to allocate a distribution between Roth and non-Roth amounts? What were your reasons for choosing that ordering rule? How much of the ordering rules is in the plan document, and how much is the plan administrator’s interpretation?

Is there any particular kind of distribution for which you don’t permit a claimant to request his or her preferred allocation between Roth and non-Roth amounts? If so, why do you preclude the choice?

If a qualified domestic relations order doesn’t state details on which portion of the alternate payee’s portion is to be credited as Roth amounts, what ordering rule do you use? Is that rule stated in the plan document? Stated in the QDRO procedure? A rule you interpret for practical administration?

[K2retire]

In most cases we process all distribution requests pro-rata from all money types. Due to limitations of our recordkeeping system's ability to properly track income vs. amounts deposited, we have written all of our documents to prohibit any in-service distributions or loans from Roth.

[A Shot in the Dark]

That decision is an administrative election set in our plan document.

The employer sets the distribution order for Roth Contributions; ie:

Other accounts first

Pro Rata

Participant Election

Most of our clients have elected Other accounts first or Participant election.