Roth Buy Back

[Mr Bagwell]

Two Buy Backs in one year..... yikes.  Never experience one, yet two in 3 months....

An employee deferred Roth to a 401k prior to us.  He also had pre tax monies.  Said employee terminated and rolled Roth dollars to a Roth IRA.  Rolled pretax dollars to IRA.  $15k in forfeitures at time of distributions.  Employee wants to restore his dollars to get the forfeitures back.

What are your thoughts on Roth buy-back?  Specifically, the Roth start year.

I see you can't Roll a Roth IRA to 401k.  But we aren't talking about a Rolling back....

The Roth start year starts over when Roth from 401k goes to Roth IRA.....  probably why you can't roll Roth IRA to 401k.....

And then there is the IRA provider (E-trade).

If the Roth can be brought back into the plan.  How would you handle the Roth start year situation?

[Mr Bagwell]

Did anyone have any thoughts on this topic?

Thanks

[Luke Bailey]

I'm not sure I completely understand your question. Are you saying the participant terminated employment from company A, took a complete distribution from company A plan ,a portion of which consisted of Roth money, suffered a forfeiture of part of his other contributions, rolled the Roth money to a Roth IRA, and now wants to roll Roth money back into your plan to buy back the forfeitures, but not the same Roth money he/she rolled to the Roth IRA? Is the roll-back Roth money coming from a designated Roth account in another 401(k)?

[Tom Poje]

I think what is being asked is the following:

I start a Roth, so the 5 year clock starts ticking.

I closed out the Roth 401k, but now want to exercise the  'buy back' option.

I guess going by the term commonly used 'buy back' I am buying back the original start date of the Roth as well, though I couldn't say anything for certain. 

[Mr Bagwell]

13 hours ago, Luke Bailey said:

I'm not sure I completely understand your question. Are you saying the participant terminated employment from company A, took a complete distribution from company A plan ,a portion of which consisted of Roth money, suffered a forfeiture of part of his other contributions, rolled the Roth money to a Roth IRA, and now wants to roll Roth money back into your plan to buy back the forfeitures, but not the same Roth money he/she rolled to the Roth IRA? Is the roll-back Roth money coming from a designated Roth account in another 401(k)?

It is the same Roth money from a Roth IRA.

[Mr Bagwell]

2 hours ago, Tom Poje said:

I think what is being asked is the following:

I start a Roth, so the 5 year clock starts ticking.

I closed out the Roth 401k, but now want to exercise the  'buy back' option.

I guess going by the term commonly used 'buy back' I am buying back the original start date of the Roth as well, though I couldn't say anything for certain. 

The 5 year clock is part of the issue too.

I'm using the term 'buy back' for the restoration process. 

[Luke Bailey]

OK. So first, once you have rung the Roth bell within the plan, it stays rung, i.e., you permanently have a Roth holding period dating back to first day of plan year of first Roth in that plan. See 1.402A-1(c). Second, you can't roll from a Roth IRA to a designated Roth account in an employer plan, even if the amount in the Roth IRA came from the plan you want to roll back to. See 1.408A-10, Q&A-5. 

[BG5150]

Is a "buyback" a rollover into the plan?  What if the plan does not allow rollovers in?

[Mr Bagwell]

I wouldn't think that buy back restoration would be a rollover.

 

[BG5150]

1 hour ago, Mr Bagwell said:

I wouldn't think that buy back restoration would be a rollover.

 

Then I wouldn't think that Roth IRA money to a 401(k) plan would be an issue in this case.  I would process it as a transfer in.

[K2retire]

1 hour ago, Luke Bailey said:

OK. So first, once you have rung the Roth bell within the plan, it stays rung, i.e., you permanently have a Roth holding period dating back to first day of plan year of first Roth in that plan. See 1.402A-1(c). Second, you can't roll from a Roth IRA to a designated Roth account in an employer plan, even if the amount in the Roth IRA came from the plan you want to roll back to. See 1.408A-10, Q&A-5. 

And there's the crux of the problem! Most plans I've worked with require that ALL of the previously distributed funds be returned to get the forfeited money restored.

[Luke Bailey]

Good question as to whether a buyback is a rollover. I am not aware of any reg that explains exactly what a buyback is. I have seen and drafted (and gotten DLs) on provisions that say that the buyback can come from any source and tax consequences depend on source. E.g., the participant can roll back in from a traditional IRA (in which case the plan says the money is treated like a rollover), can use after-tax funds that have never been in a plan (in which case the funds are treated as after-tax contributions but not subject to 415(c)). I would think it's a rollover if it's coming out of an IRA, and not doable if from a Roth, but maybe not.

[Mr Bagwell]

The example in the EOB 2013 version, says these words about use of rollover vehicle to make repayment. "Clara withdraws $6,000 from the recipient plan of the rollover and rolls over that amount to the profit sharing plan to make her payment."  Emphasis mine.  With that said, the Roth IRA to 401k is out.  Luke has the same thoughts above.

3 hours ago, Mr Bagwell said:

I wouldn't think that buy back restoration would be a rollover.

I may have changed my mind about this statement.  I am holding my judgment for now.

The employee can repay the pretax dollars from the rollover IRA, no problem. 

Sorry, this is going to get weirder... 15k on the line.  You know the employee is going to ask.....

Could the employee repay the Roth distribution via a personal check and we start the Roth basis first year at 2018?  I just don't see how the employee would get the benefit of the Roth first year back from 2010.

[Luke Bailey]

I think that the answer is probably that for the buyback they're never going to get the Roth status back. If the participant is reemployed and starts making new Roth elective contributions or does a Roth in-plan rollover, the Roth period will go back to 2010 in the employer plan. But I don't see how they can ever get the Roth they took out back in the plan as Roth money. We know they can't roll it back as a Roth. If they take money out of the Roth and use it to buy back into the plan, and it's not a rollover, then that's fine, but there's no basis for putting it back into a Roth account in the plan and they have tax consequences of the distribution from their Roth IRA. If it's a qualified distribution (i.e., participant is 59-1/2 and the money's been in the Roth IRA for 5 years), then it's just nontaxable income to them (if they don't roll it over), but then it is an after-tax contribution to plan. If it is not a qualified distribution from the Roth IRA, then they pay tax on some of what they get out of the Roth IRA, and maybe some 10% penalty, and again what they put back into the K-plan to buy back in is after-tax. This actually makes sense, once you accept the rule that there can be no rollover from Roth IRA to employer plan.