The legislation to avoid the “Fiscal Cliff” did not spawn widespread retirement plan changes as many had feared. However, there is a minor change related to Roth conversions in eligible retirement plans. 401(k) plans that allowed for Roth 401(k) contributions also allowed for the conversion of participant accounts to Roth accounts, but only if the participant had a distributable event. Such events are typically termination of employment, reaching normal retirement age, reaching early retirement age, permanent disability, death, or attainment of age 59 ½. Under the new legislation, participants can convert their accounts to Roth accounts without having a distributable event. The new rules appear applicable to 401(k), 403(b) and some 457 plans. Plan conversions will be taxed in the same manner as Roth IRA conversions.
It remains to be seen just how many participants will avail themselves of this new provision, but plan administrators should be mindful of this change. There was significant practice community furor when the new Roth conversion rules came out a couple of years ago only to see a very select group of account holders go through with the transaction. We suspect that this too will see limited traction even though it is viewed as a revenue raiser by lawmakers. There are many individual specific considerations when evaluating the merits of a Roth conversion and account holders should use great care before completing the transaction.
The retirement plan community is anxiously waiting to see if any subsequent legislation adversely effects participants’ ability to save for retirement. Many practitioners are fearful that many of the limits that were increased over 10 years ago will be scaled back, significantly impeding individuals’ ability to save for retirement. If you have any questions related to the new provision or any other aspect of your retirement plan, please contact Mark Flanagan of Aronson’s Employee Benefit Plan Services Group at 301.231.6257.