Designated Roth Accounts in 401(k) or 403(b) Plans
Beginning in 2006, an employer's 401(k) or 403(b) plan may permit an employee to designate some or all of his or her elective contributions under the plan as designated Roth contributions. This means a participant in a cash or deferred arrangement under a 401(k) plan or under a 403(b) salary reduction agreement that includes qualified Roth contributions may elect to make designated Roth contributions to the plan in lieu of elective deferrals.
Please be aware that this is not a new type of plan. Designated Roth contributions are a new type of contribution that can be accepted by new or existing 401(k) and 403(b) plans. This feature is permitted under a Code section added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
For employees to make designated Roth contributions to a 401(k) or 403(b) plan, an employer's plan must contain language that allows for these Roth contributions. IRS Notice 2006-44 provides a sample plan amendment for sponsors, practitioners, and employers (plan sponsors) who want to provide for designated Roth contributions in their section 401(k) plans.
Some important information to know:
- Designated Roth contributions are elective contributions that, unlike pre-tax elective contributions, are currently includible in gross income. If a 401(k) plan is going to provide for designated Roth contributions, it must also offer pre-tax elective contributions.
- A designated Roth account is a separate account under a 401(k) or 403(b) plan to which designated Roth contributions are made and for which separate accounting of contributions, gains, and losses is maintained.
- The employee contributions to a Roth 401(k) must be reported on Form W-2 in box 12 with a code of AA.
- The employee contributions to a Roth 403(b) must be reported on Form W-2 in box 12 with a code of BB.
- Form W-3 will be affected because the amounts reported on the W-2 forms in box 12 with code AA or BB will need to be included in the total amount reported in box 12 of Form W-3.
- Employers can make matching contributions on designated Roth contributions; however, only an employee's designated Roth contributions can be allocated to designated Roth accounts. The employer's matching contributions made on account of designated Roth contributions must be allocated to a pre-tax account, just as matching contributions on traditional, pre-tax elective contributions are.
Read more about designated Roth accounts on the IRS Web site:
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