3786 / What in-plan rollovers are permitted with respect to designated Roth 401(k) or 403(b) accounts?

Section 402A(c)(4) allows plans to permit rollovers from Section 401(k) plans to designated Roth accounts in the same plan (“in-plan Roth rollovers”). The rollover may be accomplished by a direct rollover or a 60 day rollover.¹ Amounts can be rolled over even if they would not otherwise be distributable.²

In-plan Roth direct rollovers simply change the plan account in which the amount is held and the tax character. They are not treated as a distribution for situations involving plan loans, spousal annuities, participant consent before an immediate distribution of an accrued benefit in excess of $5,000, and elimination of optional forms of benefit.³

A qualified distribution is included in gross income as if it were not rolled over to a designated Roth account. The taxable amount of the in-plan Roth rollover is the amount that would be includible in a participant’s gross income if the rollover were made to a Roth IRA. This amount is equal to the fair market value of the distribution reduced by any basis the participant has in the distribution.⁴ The taxable amount of a distribution that an individual rolls over in an in-plan Roth rollover generally is includible in gross income in the taxable year in which the distribution occurs.

Prior to 2018, a rollover to a Roth IRA could be unwound. This option was eliminated by the 2017 tax reform legislation. An in-plan rollover could never be unwound (recharacterized) because the recharacterization rule in Section 408A(d)(6) applied only to contributions to IRAs.⁵ In-plan Roth direct rollovers are not subject to the otherwise mandatory 20 percent withholding and cannot be withheld for voluntary withholding.⁶

A written explanation of the in-plan Roth feature must be provided to the participant with the written explanation that the plan provides to individuals receiving an eligible rollover distribution.⁷