ASPPA Recommends Guidance Clarifying Holding Period Trigger for In-Plan Roth IRA Conversions

The American Society of Pension Professionals and Actuaries ("ASPPA") appreciates the guidance that the Internal Revenue Service ("IRS") has provided in the area of Roth 401(k) plans. We respectfully request that the IRS issue additional guidance confirming that the 5-year period of participation for tax-free distributions from a Roth account that was created by an internal Roth conversion inside a 401(k) plan begins on the date of the conversion.

ASPPA is a national organization of more than 8,500 retirement plan professionals who provide consulting and administrative services for qualified retirement plans covering millions of American workers. ASPPA members are retirement professionals of all disciplines including consultants, administrators, actuaries, accountants, and attorneys. ASPPA is particularly focused on the issues faced by small-to medium-sized employers. ASPPA's membership is diverse but united by a common dedication to the employer-based retirement plan system.

Code section 402A provides that:

Moreover, the regulations associated with internal IRA Roth conversions specifically include language treating the internal conversion as starting the 5-year holding period.³ It is clear that the purpose of the statutory language in IRC section 402A was to allow Roth conversions to occur without the need to take a distribution and roll the funds into an IRA and to create parity between internal and external Roth conversions. The statutory language of IRC sections 402A(d)(2) and 408A(d)(2), which provide descriptions of the 5-year holding periods for contributions to qualified retirement plans and IRAs, respectively, is substantially similar.⁴

Based on the foregoing, we do not believe that technical corrections to the statute are necessary to confirm that intent to provide parity and we request that the IRS issue guidance to confirm that the 5-year holding period begins at the date of conversion.

ASPPA recommends that the IRS issue guidance clarifying that the five-taxable-year holding period for in-plan Roth conversions begins as of the date of conversion. This appears to be the intent and is consistent with the treatment of Roth accounts created by the conversion of accounts by any other method.

These comments were prepared by ASPPA's 401(k) subcommittee of the Government Affairs Committee, David Schultz, Chair, and primary authors Charlie Clark and David Schultz. We welcome the opportunity to discuss these issues. If you have any questions regarding the matters discussed herein, please contact Craig Hoffman, General Counsel and Director of Regulatory Affairs at (703) 516-9300.

Thank you for your time and consideration.

²See, IRC §§ 402A(a)(1) (stating that "any designated Roth contribution made by an employee pursuant to the program shall be treated as an elective deferral for purposes of this chapter, except that such contribution shall not be excludable from gross income"); 402A(c)(4)(C) (stating that "Any distribution to which this paragraph applies shall not be taken into account for purposes of paragraph (1)").

³See, Treas. Reg. § 1.408A-6, Q&A-2 (stating "The 5-taxable-year period described in A-1 of this section begins on the first day of the individual's taxable year for which the first regular contribution is made to any Roth IRA of the individual or, if earlier, the first day of the individual's taxable year in which the first conversion contribution is made to any Roth IRA of the individual . . .").

⁴ IRC section 402A(d)(2)(B) states that "A payment or distribution from a designated Roth account shall not be treated as a qualified distribution if such payment or distribution is made within the 5-taxable-year period beginning with the earlier of -- (i) the first taxable year for which the individual made a designated Roth contribution to any designated Roth account established for such individual under the same applicable retirement plan, or (ii) if a rollover contribution was made to such designated Roth account from a designated Roth account previously established for such individual under another applicable retirement plan, the first taxable year for which the individual made a designated Roth contribution to such previously established account." IRC section 408A(d)(2)(B) states that "A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA (or such individual's spouse made a contribution to a Roth IRA) established for such individual."