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IRS Issues Sample ROTH 401(K) Amendment

The IRS has issued sample language by which a 401(k) plan sponsor may adopt a “Roth” feature for the plan. A Roth 401(k) feature allows employees to make after-tax contributions to the plan, but then receive a distribution of those contributions and earnings on a tax-free basis. This option may be of particular interest to younger employees, or to highly compensated employees who expect to remain in a relatively high tax bracket following their retirement.

Although the statutory basis for Roth 401(k) contributions was created in 2001, these contributions were not allowed until January 1, 2006. This delay was intended to give the IRS time to issue regulatory guidance. And, indeed, final regulations addressing many issues arising under a Roth 401(k) feature were issued on January 3, 2006.

The sample language, as contained in IRS Notice 2006-44, is drafted in a prototype plan format. It thus contains language suitable for inclusion in both a basic plan document and an adoption agreement. Nonetheless, sponsors of individually designed plans may look to the sample language for guidance in drafting appropriate amendments to their plans. (For that matter, even 403(b) plans may be amended to include a Roth feature.)

The Notice makes clear that a plan amendment must be adopted by the last day of the calendar year in which a Roth 401(k) feature is implemented. Moreover, the Notice spells out certain requirements for “adopting” such an amendment. The amendment must be evidenced by a written document, and that document must be both signed and dated by the plan’s sponsoring employer. This is true even if the employer has adopted a prototype plan.

Before implementing a Roth 401(k) feature, an employer will want to consider whether this feature is appropriate for its work force. It will also want to touch base with the plan’s recordkeeper to determine whether adding the feature will increase the plan’s administrative costs. Some recordkeepers may also require several months’ notice in order to put the appropriate systems into place. Finally, an employer will want to verify that its payroll provider (or internal payroll department) will be able to supply the plan’s recordkeeper with separate feeds of pre-tax and after-tax contributions.