ICI Asks for Clarification of Rules on Distributions from Roth Accounts

Washington, DC, April 26, 2006 - In a recent comment letter, ICI asked the IRS for clearer guidance on the treatment of distributions from designated Roth accounts in 401(k) plans and 403(b) arrangements, including simplification of the proposed rules for rollovers and hardship distributions.

Background
The Roth 401(k) contribution feature was created under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. Beginning in 2006, employers that offer 401(k) plans to their employees had the option of adding a Roth 401(k) feature, which allows employees to save after-tax dollars in a separate account under their traditional 401(k) plan. Distributions from the account generally are tax free, once the participant reaches age 59½. An employee's annual elective deferrals and designated Roth 401(k) contributions combined (before any permissible "catch-up" contributions for employees age 50 and over) must not exceed $15,000 in 2006.

Earlier this year, the IRS proposed regulations that govern the taxation of distributions from designated Roth accounts.

ICI Position
In its letter, ICI asks the IRS to simplify the proposed rules, such as those for reporting and hardship distributions, so that plans and service providers offering Roth contributions can operate efficiently and without unnecessary cost. Some of the recommendations also would lessen the potential for confusion among plan participants. The Institute also suggests a number of clarifications to the proposed rules on rollovers of designated Roth accounts and certain issues relating to 403(b) arrangements, where the proposed guidance is unclear.

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