Final Regulations on Roth 401(k)s Issued

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The U.S. Treasury Department and the IRS issued final regulations Dec. 30, 2005, on establishing and offering Roth 401(k)s to employees. The final regulations took effect Jan. 1, 2006 and made few revisions to rules proposed in March 2005.

The final regulations make clear that plan sponsors may not only offer Roth 401(k) plans; they must offer pre-tax elective contributions as well. Plans must allocate Roth contributions and earnings to the separate Roth account within the plan, but they cannot allocate forfeitures and matching contributions to the separate Roth account. A plan is allowed, but not required, to permit highly compensated employees with both pre-tax and Roth contributions in the same year to elect whether excess contributions will be considered pre-tax or Roth contributions.

The final regulations do not cover Roth 403(b) contributions or the taxation of distributions of Roth 401(k) contributions, but the latter topic is scheduled to be addressed soon. Because the larger tax bill that created Roth defined contribution accounts is slated to sunset at the end of 2010, additional guidance will be needed if Congress does not extend the law.

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