Treasury, IRS Seek Input on Coming Guidance on Roth Transfers

Whether and, if so, how to apply vesting rules to in-plan Roth transfers are among questions that a working group will try to answer as the Treasury Department and Internal Revenue Service prepare guidance on a new tax code provision created by recent fiscal cliff legislation, a Treasury official said Jan. 31 at the Los Angeles Benefits Conference.

The legislation, enacted into law in January as the American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240), provided no language requiring that the amount be vested when it is transferred, George H. Bostick, benefits tax counsel in Treasury's Office of Tax Policy, said during a luncheon speech at the conference.

In preparing guidance, officials want to anticipate the possibility of forfeitures and other unpredictable events and, thereby, “avoid creating a trap for the unwary,” Bostick said. For example, an employee might pay taxes on a nonvested amount in a traditional Section 401(k) account before transferring it into a Roth account in the same plan and later have to forfeit that amount because it was not vested according to the plan terms, he said.

 “If we allow that and somebody does forfeit, what will the [tax] treatment be? Those are the sort of vesting questions that come up,” Bostick said.

Excerpted from a story that ran in Pension & Benefits Daily (2/5/2013).