Roth Rollover to Plan that doesn't have Roth

We had a participant have a rollover processed from her old employer that was all Roth money not knowing that her current plan does not have Roth.  The current plan's custodian cashed the rollover check into the plan as the custodian does not have the ability or discretion on whether the type of funds is acceptable.  After current plan sponsor acknowledged they can't accept the current custodian issued check back to prior institution.  Now we have prior institution stating they will not accept the money back to help the participant have a new election.

Anyone have experience with this type of situation? How to correct?  I can't imagine the current custodian having any options other than issuing back to prior institution without having a transaction of some sort in the current plan.

Have her set up a Roth IRA for the funds, new custodian sends funds there?

If the receiving plan can't accept the funds how does the new custodian have authority to issue to another institution?  How does a participant make that election from a plan that isn't actually holding the assets?  Issuing to a Roth IRA would need to generate another 1099R, correct?  

Can a “corrective” amendment put in ROTH so that the ROTH rollover in certain circumstances like this one be allowed?

43 minutes ago, chc93 said:

Can a “corrective” amendment put in ROTH so that the ROTH rollover in certain circumstances like this one be allowed?

That would probably be acceptable under EPCRS self correction, but it would require adding ROTH for all purposes and the client may or may not want to do that.

Has the 1099R been issued by the previous custodian? If one has been issued, then I'm assuming the tax code used would be "G", which is incorrect (because the funds are not in a designate Roth money type). I would see if they would do a corrected 1099R with a tax code "H" and then have the employee open a Roth IRA and have the current custodian send the funds into the Roth IRA. If a 1099R has not been issued, see if they would be willing to code the transactions as a "H" and do the same act.

We might be dealing with the same custodian.   We frequently deal with issues like this due the custodian accepting rollover money before it can be confirmed the rollover is acceptable. We have been unsuccessful in getting them to change their procedures.

The receiving plan has been holding the assets ever since the check proceeds were placed in the plan's cash account.   If it has been determined by the Plan Administrator to be an invalid rollover due to terms of the document, the correction is to distribute it from the plan as soon as possible.
 

See  https://www.irs.gov/retirement-plans/verifying-rollover-contributions-to-plans

We have the participant complete a distribution form instructing us where to send the money. We issue a new 1099R as it is a new distribution. As Bri stated, this participant just needs to setup a Roth IRA.   

Karl, the receiving plan DID accept the funds when the plan's custodian cashed the check and the receiving plan has not established a procedure for reasonably concluding that the rollover is valid (per 1.401(a)(31)-1, A-14). 

Under A-14, if they had a reasonable rollover acceptance procedure, the plan administrator that accepted the rollover in error could distribute the amount of the invalid rollover with earnings to the EMPLOYEE.  Under this rule, (1) the receiving plan administrator could send a letter to the unhelpful distributing plan to let them know the direct rollover failed and that they need to update their 1099-R reporting the rollover appropriately (to a distribution using distribution code B for a regular distribution from a Designated Roth Account, I believe), (2) then issue the check for the invalid rollover contribution plus earnings to the employee.  This lets the employee decide how/whether to roll over the check amount to a Roth IRA (within 60 days). 

This reg. doesn't say how to handle it when the receiving plan does not have a procedure for reasonably concluding the rollover is valid - which may be something that can be fixed under EPCRS.   (I think the 1099-R for the distributing plan under EPCRS would show the original invalid rollover contribution amount in box 5 - since the distributing plan should already be showing it as taxable after you notified them of the correction above, and the earnings amount if any - which hasn't been reported by anyone as taxable yet as taxable in 2a). 

But LauraH what tax code would you use to report the distribution? If you use tax code "B" or a combination of "B2" you're saying that the funds were distributed from a Designate Roth account, which the plan doesn't allow, same with tax code "H". If you use tax code "1", "2", "7" or "G" than you're saying funds are coming from a pre-tax money source going to a Roth and the client is subject to taxes? That's why I think it needs to be fixed by the prior custodian.

In response to Lou S:  That would probably be acceptable under EPCRS self correction, but it would require adding ROTH for all purposes and the client may or may not want to do that.

Can't a plan add a Roth 401(k) Source Bucket for rollovers from other employer plans without providing for Roth 401(k) deferrals?  For example, why can't the plan allow for in-plan Roth conversions without allowing individuals to make Roth 401(k) contributions?  

If that doesn't work, why not amend the plan to allow for Deemed Roth IRAs - assuming the service provider has experience administering Deemed IRAs. 

6 hours ago, BenefitJack said:

Can't a plan add a Roth 401(k) Source Bucket for rollovers from other employer plans without providing for Roth 401(k) deferrals?  For example, why can't the plan allow for in-plan Roth conversions without allowing individuals to make Roth 401(k) contributions?  

On the first question quoted above, Chapter 7, Section IV, Part E.2 of The ERISA Outline Book, citing Treas. Reg. Section 1.402A-1, Q&A-1 says that a qualified plan may only accept Roth rollover contributions if it accepts Roth contributions more generally.  That's the consensus view, although reading the regulation leaves me less than fully convinced.

On the second question quoted above, it is a clear "no."  IRS Notice 2010-84, Q&A-19, a portion of the notice that was not modified by Notice 2013-74.

21 hours ago, Lou S. said:

That would probably be acceptable under EPCRS self correction, but it would require adding ROTH for all purposes and the client may or may not want to do that.

It's worth asking.

To M. Weddell: 

Thanks for explaining. 

Do you have any idea of the rationale for those limits, or is this simply arbitrary IRS rules (similar to the rule that precludes rollovers of Roth assets to a Roth IRA, and, even where not commingled (aka, the old conduit rules), still cannot be rolled over to a subsequent employer's Roth 401k account? 

For example, the code itself (402A) does not define the term "Designated Roth Account" - so the IRS has arbitrarily defined it to limit Roth 401k to only those where Roth 401(k) contributions are permitted in lieu of elective deferrals. 

I also have an issue with the imprecise language of "are permitted" instead of expressly confirming that Roth 401(k) deferrals are required. 

Do you know anyone who has innovated in the space of Deemed Roth IRAs?

Thanks, Jack

BenefitJack,

I answered the questions as best as I could, including providing citations.