Allowing Roth Conversions for All Vested Amounts

“I noticed that our ERISA 403(b) plan allows for Roth conversions, but only for employees who are otherwise eligible for a distribution. Is there any reason that we would not wish to extend the Roth conversion option to all employees?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

At this point, there are limited reasons to maintain this restriction. One reason is the need to track any distribution restrictions through the conversion.  For example, if a participant converts pre-tax elective deferrals to Roth amounts prior to age 59.5, such amounts must be tracked separately from those that are otherwise eligible for distribution.

The fact that your plan has this Roth conversion language likely stems from a historic quirk in the law. Back in 2010, when the Roth conversion rules were enacted, conversions were indeed limited only to those participants who were otherwise eligible to receive distributions from your plan. However, those rules were changed by the American Taxpayer Relief Act of 2012 for all vested amounts after 2012. Now, all vested contributions are eligible for conversion to Roth, if the plan permits, even if the participant is not yet eligible for a distribution from the plan.

When the change to the Roth conversion rules was first made in 2013, many recordkeepers were not yet ready to allow conversions for all vested amounts, as they had only recently reprogrammed their operating systems to allow Roth conversions only for amounts that were eligible for distribution. However, over time, most recordkeepers have modified their operating systems to allow Roth conversions for all vested amounts. Still, you should check with your recordkeeper(s) or third-party administrator(s) (TPAs) to confirm that it can properly administer Roth conversions for all vested amounts before amending your 403(b) plan to allow for such conversions.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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