In-Plan Roth Conversion - Terminated Participants

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If a plan amends to allow "in-plan" Roth conversions, can they exclude terminated participant from the option? Any thoughts appreciated.

[Guest Holly Foster]

I just posted a similar question on the distribution board:

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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?

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[Belgarath]

Based purely upon personal experience, a former employee who is savvy enough and "in tune" enough to direct the employer to do an in-plan Roth conversion will also not generally be one of the "disappearing employees" who can't be located.

FWIW, I can't offhand think of a defensible basis for not permitting a terminated employee to do the conversion. I think the nondiscrimination issues are a valid concern. Note that the 402(f) notice must disclose this option, although a 402(f) notice is of course given in other situations that have nothing to do with a distribution due to termination of employment. I guess that in the absence of further guidance specifically allowing it, I wouldn't restrict it to active employees.

[Bird]

I agree that it's probably best to allow former employees the same benefits right and features as everyone else, however, I think that Reg. 1.401(a)(4)-10© would allow such a restriction as long as it did not discriminate in favor of former HCEs.

© Nondiscrimination in availability of benefits, rights, or features. A plan satisfies section 401(a)(4) with respect to the availability of benefits, rights, and features provided to former employees if any change in the availability of any benefit, right, or feature to any former employee is applied in a manner that, under all of the relevant facts and circumstances, does not discriminate significantly in favor of former HCEs. For purposes of demonstrating that a plan satisfies section 401(a)(4) with respect to the availability of loans provided to former employees, an employer may treat former employees who are parties in interest within the meaning of section 3(14) of the Employee Retirement Income Security Act of 1974 as employees

[Belgarath]

See Mbozek's comment from another post on this same subject. http://benefitslink.com/boards/index.php?s...c=47321&hl=

[masteff]

See Mbozek's comment from another post on this same subject. http://benefitslink.com/boards/index.php?s...c=47321&hl=

The citation he bases that on is irrelevant because it speaks to investment alternatives... a Roth account is not an investment alternative.

[mbozek]

See Mbozek's comment from another post on this same subject. http://benefitslink.com/boards/index.php?s...c=47321&hl=

The citation he bases that on is irrelevant because it speaks to investment alternatives... a Roth account is not an investment alternative.

My initial response in response to the OP's inquiry cited a specific RR which gave an example of a significant detriment. However reg. 1.411(a)-11(b)(2) applies to any significant detriment imposed under a plan on any participant who does not consent to a distribution as determined by the IRS after examining the particular facts and circumstances. I will leave it up to the rest of you decide whether limiting terminated participants investment opportunities to pre tax funds where a Roth account is available to active employees is a significiant detriment but I will ask why would a plan admin take such a risk by limiting the choices of terminated participants to pre tax options.

Also I have not reviewed whether there are provisions in the roth regs that would prevent such a practice.