Roth IRA -

* A separate recordkeeping account must be established for each participant who wishes to make Roth 401 (k) contributions.

Rules of the Roth 401 (k):

To help with your decision, it is important to understand the rules of the Roth 401(k):

* Roth 401(k) accounts are required to be separate accounts - the after-tax contributions cannot be combined with pre-tax contributions.

* Distributions from the Roth 401(k) will be tax free for federal income tax purposes provided that both a 5-year holding period and a qualifying event requirement are met:
a) The 5-year holding period begins with the first contribution to any Roth 401(k) account in the employer's plan.
b) Qualifying events are limited strictly to attainment of age 59 1/2, death, or disability.

Rollovers to a Roth 401(k) may be made from other employer sponsored Roth accounts. If rolled over to a Roth 40 1 (k), the 5-year holding period begins with the earlier of the date the rolled over account was established, or the date the receiving Roth account was established.

Our Reservations

The following is a summary of our reservations. Please contact our office for further discussion in greater detail.

A. The IRS should issue guidance clearing up that the determination of the five-taxable-year holding period is based on a calendar year rather than the plan year.

B. Requiring the plan administrator of the receiving plan to be responsible for tracking eligible rollovers of Roth contributions into a 401(k) plan and the time at which a Roth contribution was first made would be a deterrent to accepting rollovers of Roth contributions and would effectively restrict the transfer of these amounts. Participants should be responsible for tracking both the basis in the rollover account and the time at which a Roth contribution was first made.

C. Sponsors of plans that allow for Roth contributions should also have the ability to include plan provisions that set out ordering rules with respect to the account sources for all types of plan distributions.

D. The IRS should issue sample or good-faith amendments that plan sponsors may use without affecting reliance on prior determination letters, notification letters or opinion letters as to the qualification of the terms of their plans.

E. Sponsors of 401(k) plans that allow for Roth contributions and who want to implement an automatic enrollment feature should be able to choose whether pre-tax or Roth elective contributions will be the default election for participants.

F. Sponsors of 401(k) plans that allow for designated Roth contribution programs should be allowed to impose limitations on the ability and frequency of plan participants to choose between Roth and pre-tax elective contributions in a given calendar year without violating IRS rules

G. A new model Distribution Notice to take into account distributions of both pre-tax and designated Roth elective contributions will be necessary. The current model is already 6 pages in length

H. A plan sponsor should be able to maintain a plan that only allow for Roth contributions and no pre-tax salary deferrals.

Final Note

Again, we recommend that Employers and Sponsors of 401(k) Plans that are considering adopting the Roth provisions seriously consider the reservations noted above. Perhaps it may be best to allow others to race ahead and see how they fare

Lawrence Groves is the Director of Small Business Retirement Services for the Retirement Group with the Solo 401k administration programs at :
http://www.solo-k.com; and http://www.womensolok.com

Lawrence comes to his clients with over 25 years as an experienced expert in plan design, administration, and compliance. Lawrence works closely with small business plans and can be reached at Lawrence@solo-k.com or (727) 277-4137