Roth 401(k) Knowledgebase
Frequently Asked Questions
(FAQs)
The benefits associated with the new Roth 401(k) feature
are foreign to most individuals, the rules are numerous, and future tax
rates are not predictable with any certainty. Therefore, the old saying “there’s
no such thing as a stupid question” certainly applies relative to the Roth
401(k).
FAQs for Employer/Plan Sponsors
FAQ 1: As
the plan sponsor, must I offer the option to contribute to a Roth 401(k)?
No. The Roth 401(k) is a
plan design feature; therefore, it is up to the plan sponsor to decide if this
feature is included in a new or existing plan.
FAQ 2: Are
there additional recordkeeping and administration requirements associated with
the Roth 401(k) option?
Yes. There are numerous special
requirements for the Roth 401(k) which include but are not limited to:
different taxation of contributions and distributions as compared to the
pre-tax option, separate accounting of principal contributions and interest,
participant disclosure and reporting.
FAQ 3: Is
the Roth 401(k) subject to compliance and
testing requirements?
Yes. All of the requirements that apply to pre-tax 401(k) deferrals also apply to
Roth 401(k) deferrals.
FAQ 4: If I elect “safe harbor” status, does the Roth 401(k) impact the required
participant disclosure?
Yes. The safe
harbor notice must be provided at least 30 days prior to the beginning of the
year and must contain a description of the type and amount of compensation
that may be deferred.
FAQ 5: If I
add a Roth 401(k) feature, will it cost more for recordkeeping and
administration of my plan?
Likely Yes. You should expect to
incur additional costs associated with some or all of the following: payroll
systems programming, plan amendments and participant disclosures,
administrative form revisions, recordkeeping and compliance services, and
employee communications. In addition, keep in mind the cost for downtime of
personnel required to evaluate the desirability of the Roth feature as well as
downtime for staff when this new benefit is communicated and implemented.
FAQ 6: If I
match Roth contributions, are the matching contributions after-tax
contributions?
No. Employer matching contributions for both
pre-tax and Roth are tax deductible.
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FAQs for Participants
FAQ 1: Can
I contribute $15,500 (plus $5,000 if I am age 50 or older) to the pre-tax
option and the same amount to the Roth?
No.
The $15,500/$5,000 limits apply to the total of your contributions to any and
all 401(k) plan(s).
FAQ 2: Can
I contribute to both accounts within these limits?
Yes, if your plan permits
contributions to both money types.
FAQ 3: If I contribute to
the Roth account in my employer’s 401(k) plan, can I still contribute to a
Roth IRA?
Yes.
This assumes you are not prohibited from contributing based on your adjusted
gross income.
FAQ 4: My
employer matches my pre-tax contributions; will I receive a match on Roth
contributions?
Most likely yes. Most employers will
match Roth 401(k) contributions the same as they match pre-tax contributions.
FAQ 5: Will I receive the
same employer match on Roth contributions as I do on pre-tax contributions?
Maybe. If you reduce your pay by the
same dollar amount
as for the pre-tax contribution, the Roth
contribution is lower since you pay tax now, so it is possible that
the lower Roth may not qualify for the same match.
Example:
Roth May Not Qualify for Highest Available Match
FAQ 6: If
my employer matches my Roth contribution, is the match contributed to the Roth
account and is it distributed tax-free?
No. All matching contributions are contributed to the
same tax deferred employer match account.
FAQ 7: Can
I roll over my Roth IRA into my Roth 401(k) account?
No. The law prohibits rollovers of
Roth IRAs into Roth 401(k) accounts.
FAQ 8: Are
minimum distributions required from a Roth 401(k) account?
Yes. However, when you become
entitled to a distribution, you can roll over your Roth 401(k) into a Roth IRA
which does not require minimum distributions.
FAQ 9: What is a
qualified distribution in the context of Roth 401(k) account?
A distribution is qualified and therefore tax-free
if it occurs after the 5-year-taxable period during which your contribution is
first deposited to the Roth 401(k) account, and the distribution is
attributable to your: 1) attainment of age 59½, 2) disability, or 3) death.
FAQ 10: If I roll over my
Roth 401(k) account into a Roth IRA, do I need to wait another 5 years before
I can take tax-free distributions?
Perhaps.
The 5-year period applies separately to Roth 401(k)s and Roth IRAs;
therefore, a new 5-year clock begins when the Roth 401(k) rollover is
deposited to the Roth IRA account. However, if:
a) You have a Roth IRA account that
satisfies the 5-year requirement, then distributions from the rollover
Roth IRA are immediately available on a tax-free basis assuming you are
age 591/2, disabled, or deceased; or
b) The rollover previously qualified for
tax-free distribution from a Roth 401(k) account, then distributions
from the rollover Roth IRA are immediately available on a tax-free
basis.
FAQ 11: What if I receive
a distribution from my Roth 401(k) account that is not qualified?
You receive a proportionate amount of both your
principal contribution and any earnings. The portion of the distribution that
represents the Roth contribution is tax-free, and any earnings are taxable
(and are subject to the 10% additional tax if you are not age 59½).
Example:
Partial
Nonqualified Roth 401(k) Distribution
FAQ 12: Are the plan’s
investment options different for the Roth 401(k) account?
Most likely not. This is permitted but will not be typical for most
plans.
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FAQS for HCEs
FAQ 1: Are
contributions to the Roth account considered
for 401(k) testing?
Yes. The same testing rules
that apply to pre-tax contributions apply to Roth contributions.
FAQ 2: Does
the Roth 401(k) option offer any advantage to me as an HCE relative to 401(k)
testing?
Yes. Because the contribution to the Roth
option equates to a higher pre-tax contribution, the Roth is the preferred
choice for most HCEs.
Case Study:
Roth is
Solution for HCEs Limited by Test Failure
FAQ 3: If I
receive a refund from a Roth 401(k) account as a result of a 401(k) test
failure, is the distribution taxable?
The portion of the distribution
that represents a proportional amount of earnings on the distribution amount
is taxable; the principal amount of the contribution is not.
FAQ 4: If
my employer’s plan elects “Safe
Harbor” status, can I contribute the maximum allowable contribution to the
Roth 401(k) account?
Yes.
The Safe Harbor eliminates the 401(k) nondiscrimination test. Therefore, you
can contribute up to the maximum annual limit on an after-tax basis without
the possibility of a refund.
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