A provision in a small-business jobs bill that Congress passed this fall allows defined contribution plan sponsors to add a Roth rollover feature to their plans. But so far, few are biting.
The feature would allow plan participants to roll over 401(k) account balances into Roth accounts. The advantage? Participants could theoretically save a great deal in taxes — depending on their current and future tax brackets — by rolling their 401(k) dollars into Roth accounts offered by their employers and paying the taxes on those funds now rather than later.
The problem is only 31% of employers plan to add the Roth rollover feature by the end of 2011, found a recent Mercer survey of nearly 300 plan sponsors. And another 45% say they have no plans to offer it at all.
The reasons employers gave for holding off on adding the Roth feature:
- They want to see how much interest there is from plan participants (37%).
- They’re waiting to see when their plan administrators will be able to handle the conversions (34%).
- They want to see what other plans sponsors will do (23%).
The majority of the employers surveyed said their employees have yet to ask about the conversion feature.
The provision to allow plan sponsors to add the feature was meant as a way to help fund the Small Business and Infrastructure Jobs Tax Act of 2010.
Plan participants rolling funds into a Roth account could elect to pay the tax on the funds in 2011 or 2012. Those taxes would then fund the bill’s small business incentives — tax cuts, loan programs, etc.
Guidance for 401(k) and 403(b) plans pertaining to the Roth conversion feature was just issued by the Internal Revenue Service. It can be found here.
