Roth 401(k) Update - Where we Stand!
Rev. 11/17/05, E-mail Alert 2005-23

With 2006 just weeks away, we still await Roth 401(k) guidance from the IRS. At last week's ASPPA Annual Conference, we were informed that the guidance will be in three pieces; final regulations updating the proposed regulations on operational issues, proposed regulations on previously unaddressed tax issues and a “sample amendment” to implement the first two guidance pieces. This approach is similar to that taken in EGTRRA guidance, provided in Notices 2001-56 and 57, in that the “sample” language will not have to be adopted on a word-for-word basis, but may be used as a guide.

Although most industry professionals assumed that the actual amendment will not have to be adopted until the end of the 2006 plan year, earlier amendments will be required of off-calendar year plans (as had been necessary with the automatic rollover amendment). Some within IRS take the position that the plan must first formally adopt Roth provisions before the deferral elections can be made and the actual withholding may start. We hope that this view will not prevail for existing 401(k) plans that are just adding Roth provisions. Although this is obviously correct for a start-up 401(k) plan whether dealing with pre-tax or Roth contributions.

Assuming we are correct on the amendment issue, certain things must still happen before Roth Deferrals can start in January. First, new participant election forms offering the Roth type contributions are necessary and must be completed. We expect to have updated enrollment forms available within the next few weeks. Second, Safe Harbor plan notices must be adjusted to reflect the Roth-type contribution. As revealed at the ASPPA conference, there is a major controversy regarding the exact language that must appear in the Safe Harbor notice under the Final 401(k) and (m) regulations. As soon the IRS clarifies this issue, we will provide updated sample notices to our clients. Because the notice must go out by December 2, 2005, at a minimum you may want to adjust the existing notice to add in the Roth contributions if they will become an available contribution type in 2006. If it is determined that additional language is necessary, then a second round of notices will become necessary. We will keep you posted. This is clearly an issue for the industry as a whole and not merely McKay Hochman clients.

In the ideal world, the Service would have issued all of the necessary guidance weeks ago. Unfortunately, we don’t live or work in an ideal world. If the IRS does not issue its “sample amendment” by the end of the month, we will provide a model amendment. As appropriate, additional guidance will be sent by flash e-mails or a special E-mail Alert.