June 30, 2005
R. Lisa Mojiri-Azad
Internal Revenue Service
CC:PA:LPD:PR (REG-152354-04)
1111 Constitution Avenue, N.W.
Washington, DC 20044
Re: Proposed Regulations on Roth 401(k) Plans
Dear Ms. Mojiri-Azad:
The American Institute of Certified Public Accountants (AICPA) appreciates the opportunity to comment on the proposed amendment to the 401(k) and (m) regulations providing guidance on designated Roth contributions. The comments were prepared by the Employee Benefits Taxation Technical Resource Panel (TRP) and were approved by our Tax Executive Committee. The members of the TRP practice in both public accounting firms and in industry, and provide professional services in tax accounting, retirement consulting, and plan administration. It is from this diverse perspective that we offer our comments.
In general, the regulations provide sufficient guidance for plan sponsors and their service providers to administer plans with Roth contributions. However, several areas within these regulations require further clarification and guidance.
Meaning of “Separate Accounts”
Five-Year Holding Requirement
Applying Ordering Rules to “Non-Qualified Distributions”
Automatic Enrollment Default
Excess Contribution Designations
Impact of Sunset Provisions
Meaning of “Separate Accounts”
The final regulations should clarify what is meant by a “separate account.” The “separate accounting requirement” should be satisfied by separately tracking designated Roth contributions, investment earnings and distributions in the participant accounting system. Physically separating the assets should not be required.
Back to top
Five-Year Holding Requirement
Under the proposed regulations, 401(k) plans must provide that designated Roth contributions may be rolled over into another 401(k) plan that permits Roth contributions, or to a Roth IRA. The final regulations should clarify the relationship between the five-year aging rules for Roth 401(k) plans and those for Roth IRAs. The final regulations should also make the participants responsible for tracking the five-year holding period requirement and allow plan sponsors to rely on participant representations regarding the five-year holding requirement.
Back to top
Applying Ordering Rules to “Non-Qualified Distributions”
Additional guidance is needed on the ordering rules (i.e., pre-tax, after-tax) applicable to “non-qualified distributions” from designated Roth accounts. We recommend using the Roth IRA ordering rules for distributions of designated Roth contributions from qualified plans.
Back to top
Automatic Enrollment Default
We recommend clarifying the final regulations to indicate that pre-tax 401(k) contributions are the default for negative elections. Participants should be required to make an affirmative election before contributions could be treated as Roth contributions.
Back to top
Excess Contribution Designations
Under the proposed regulations, plans may permit highly compensated employees (HCEs) to elect whether the excess contributions will be attributed to pre-tax elective contributions or designated as Roth contributions. We recommend that the final regulations specify that a plan may impose an ordering rule in lieu of allowing each HCE to make this election. The final regulations should also clarify that an HCE could elect to allocate the excess contributions between pre-tax 401(k) contributions and designated Roth contributions.
Back to top
Impact of Sunset Provisions
Like most provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001, Roth 401(k)s will lapse after 2010. Guidance is needed on how designated Roth contribution accounts will be treated if and when these provisions “sunset”. Before they can make informed decisions, plan participants must know the long-term tax status of their designated Roth accounts and the choices available to them, after 2010.
Additional Concerns:
· Issue guidance on Roth contributions in section 403(b) arrangements.
· Draft model amendments for adopting 401(k) provisions.
· Update section 402(f) notice to reflect Roth contributions.
· Amend instructions for Forms W-2 and 1099-R to reflect Roth contributions.
We appreciate the opportunity to comment and urge you to clarify these outstanding concerns. If we can be of further assistance please contact me at 402-280-2062 (email: tpurcell@creighton.edu); Cindy Dwyer, Chair of the Employee Benefit Tax Technical Resource Panel at 913-234-1022 (email: cdwyer@cbiz.com), or Lisa Winton, AICPA staff, at 202-434-9234 (email: lwinton@aicpa.org).
Sincerely
Thomas J. Purcell, III
Chair, Tax Executive Committee