The In-Plan ROTH Conversions, while attractive to some, will be quite an administrative nightmare. As a Third Party Administrator, I have not had a lot of requests to amend our plans to allow for the “new” In-Plan ROTH Conversions since they became available as a transfer instead of a rollover. This “new” law was effective January 1, 2013 to allow participants in a 401(k), 403(b) or 457 plans to convert ANY of their pre-tax funds to ROTH. Previously, conversions were only allowed if a participant had a distributable event.
The biggest question now will be how will the Custodians handle these transfers? And CAN they handle these transfers? When these In-Plan ROTH conversions were allowed during the 2010 plan year, there was only one year to worry about. Sure, the Custodian had to account for separate sources if multiple sources of money were converted, but only for one year. Now participants can convert any amount during any year. What if a participant finds this to be an attractive option, but doesn’t want to raise their taxable income too much during the year and decides to convert 20% of their pre-tax account balance each year for the next 5 years? Now, not only must each source be accounted for separately, but EACH year of conversions must be accounted for separately since you must track the five-year recapture tax rules. This could potentially require 5 more sources of money at a minimum. Double or triple that if they decide to convert deferrals, match, profit sharing, etc.
For Plan Sponsors looking to add this to their current plan, they may want to consider first who would be interested in the option. If they do not feel this would be attractive to many of their participants or would see this as a one-time use only, this could be a harmless amendment. If they have a large population interested in the option, they should have their trusty Third Party Administrator consult with their Custodian first.
