The Internal Revenue Service has released final regulations that will shape the new employer-sponsored Roth retirement account programs.
An employee at a company that adopts a Roth account program can pay federal income taxes on some or all of the income contributed to the employer’s retirement savings plan. In exchange, the federal government has promised not to tax Roth account retirement benefits payments and other distributions that qualify for special tax treatment.
Congress included Section 402A of the Internal Revenue Code, the law that is creating the employer-sponsored Roth account program, in the Economic Growth and Tax Relief Reconciliation Act of 2001.
The new final regulations, which take effect Jan. 3, 2006, and apply to plan years beginning on or after Jan. 1, 2006, are based on a draft that the IRS issued in March.
Although “designated Roth contributions” to an employer-sponsored retirement program are similar to Roth individual accounts, there are many differences between individual Roth accounts and employer-sponsored Roth accounts, according to a preamble to the new regulations written by 2 IRS officials, R. Lisa Mojiri-Azad and Cathy A. Vohs.
The Roth IRA rules let individuals convert traditional IRAs into Roth IRAs, but Section 402A does not let employees convert traditional employer-sponsored retirement accounts into Roth accounts, Mojiri-Azad and Vohs write.
Conversely, federal law imposes income eligibility limits on taxpayers who want to contribute to Roth IRAs but imposes no such limits on employees who want to contribute to employer-sponsored Roth accounts, Mojiri-Azad and Vohs write.
Like the draft published in March, the final regulations require that an employer credit and debit designated Roth contributions and withdrawals to a designated Roth account for the employee. “In addition, gains, losses, and other credits or charges must be separately allocated on a reasonable and consistent basis to the designated Roth account and other accounts under the plan,” Mojiri-Azad and Vohs write.
The officials note that no contributions other than designated employee contributions and certain rollover contributions may be made to an employer-sponsored Roth account.
“Matching contributions are not permitted to be allocated to a designated Roth account,” Mojiri-Azad and Vohs write.
The final rules do permit a retirement plan to use an automatic enrollment mechanism together with a Roth account program, the officials write.
The officials say the IRS is still working on regulations that will deal with taxation of distributions from employer-sponsored Roth accounts.
A copy of the current Roth account final rule is on the Web at Document Link