The Internal Revenue Service has released final regulations that will shape the new employer-sponsored Roth retirement account programs.
R. Lisa Mojiri-Azad and Cathy A. Vohs, the IRS officials who wrote the preamble to the new regulations, warn against assuming that an employer-sponsored Roth retirement account is the same as an individual Roth retirement account.
“There are many differences between these types of arrangements,” the officials write.
Section 402A of the Internal Revenue Code, the provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 that is creating the employer-sponsored Roth account program, gives employers the option of allowing employees to 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.
The new final regulations, which took 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.
In some ways, employer-sponsored Roth account rules are stricter than the rules governing individual Roth accounts.
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.
But the officials point out that other provisions of the employer-sponsored Roth account rules offer more flexibility than the rules governing the individual Roth accounts offer.
The individual Roth IRA law, for example, imposes income eligibility limits on taxpayers who want to contribute to Roth IRAs, but Section 402A imposes no such limits on employees who want to contribute to employer-sponsored Roth accounts, Mojiri-Azad and Vohs write.
Like the draft regulations 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.