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WASHINGTON – CUNA has thrown its support behind an IRS proposal that would allow credit union employees to make Roth IRA contributions to their 401(k) plans. Under the proposed regulations, a 401(k) plan may permit an employee who makes elective contributions under a qualified cash or deferred arrangement to designate some or all of those contributions as Roth contributions beginning in 2006. Although the Roth contributions could be included in employees’ gross incomes and taxable at the time of the contribution, the plans’ distributions would be tax-free. In a May 31 letter sent to the IRS, CUNA Senior Regulatory Counsel Catherine Orr said the proposal would be beneficial in that given there are no additional income restrictions on who can contribute to a Roth 401(k) plan and that there are higher contributions and catch-up limits available when compared to a Roth IRA, the regulations would allow more credit union officials and staff to take advantage of the Roth option through automatic payroll deduction options of a 401(k) plan. Regarding account rollovers, the IRS has proposed that a 401(k) plan must provide that designated Roth contributions may be rolled over only to another Roth 401(k) plan that accepts rollovers or to a Roth IRA but it shall not be treated as a qualified distribution if the distribution is made within the five-year taxable period beginning the first taxable year for which the participant made a designated Roth contribution to the plan. In the case of Roth IRAs, the five-year period starts the first taxable year for which the participant made a contribution to the Roth IRA, according to the IRS. CUNA has said clarity is needed to coordinate between the five-year aging rules for Roth 401(k) plans and Roth IRAs. “In the case of rollovers, we believe that the taxpayer should be responsible for keeping track of the holding period and that plan administrators and sponsors should be permitted to rely on reasonable participant representations as to when the first Roth 401(k) plan contribution was made,” Orr wrote. Many plans have a mandatory waiting period, such as one year, before employees are eligible to start contributing to their employer’s 401(k) plan, Orr said. The IRS should confirm that employees can roll over Roth IRA assets into a Roth 401(k) plan before becoming a plan participant, CUNA suggested. CUNA is also seeking clarity on minimum distribution rules within the IRS’ proposal. Specifically, the interaction of the minimum distribution rules found in Code Section 401(a)(9)) for Roth 401(k) plans and Roth IRAs, which are not subject to the minimum required distribution rules, meaning the individual is not required to withdraw any funds in the year in which he/she turns 70. The IRS has proposed that Roth 401(k) plan contributions be treated as elective deferrals for most purposes and are therefore, subject to the minimum required distribution rules. “Consequently, it may be possible for a participant in a Roth 401(k) plan to avoid the plan’s required minimum distribution rules by rolling over his or her Roth 401(k) account to a Roth IRA,” Orr said. CUNA agrees with the IRS’ proposed separate accounting and recordkeeping requirements, which states designated Roth contributions must be maintained by the plan in a separate account. In addition, the contributions and withdrawals of designated Roth contributions must be credited and debited to separate accounts maintained for employees who make the designations. Orr has asked the IRS to affirm in the final regulations that the requirement to maintain a separate account for a participant’s regular 401(k) plan contributions and Roth 401(k) plan contributions can be met by keeping separate records for each. “The plan administrator or sponsor should be required to: make certain the participant’s contributions and earnings are properly allocated; keep intact the participant’s designated Roth contributions that have not been distributed; and keep payroll deductions for each type of contribution separate.” Regarding loans to participants, CUNA said further guidance is needed when asset rollovers are involved. While participants in 401(k) plans may take out a loan from the plan for any reason at any age, Roth IRA holders can not. Since credit unions and other organizations wanting to provide Roth 401(k) plans to their employees will have to make amendments to comply with the new regulations, CUNA suggested the IRS publish model plan amendments which can be incorporated into existing 401(k) plan documents, including prototype plans. “We feel that many credit union employees will take advantage of the additional investment opportunities associated with the Roth 401(k) plan,” Orr wrote. “However, the law authorizing Roth 401(k) plans (under the) Economic Growth and Tax Relief Reconciliation Act of 2001 will sunset at the end of 2010. If Roth 401(k) plans prove as successful and popular as many anticipate, we hope the IRS will ensure that Roth 401(k) plans can be offered long after 2010.” [email protected]

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