Shortly after the American Taxpayer Relief Act of 2012 eased the conversion of defined contribution plan balances into after-tax Roth accounts, many employers indicated they were very or somewhat likely to add the in-plan Roth 401(k) conversion options the act created as a new federal revenue source.
Global human resources consultant Aon Hewitt conducted a survey of more than 300 U.S. employers in January, shortly after President Obama signed ATRA into law, to measure the plan sponsors’ reaction to the provisions of the package that would allow eligible 401(k) participants to shift some or all of their defined contribution retirement savings into Roth accounts, which allow participants to make after-tax contributions as part of the DC plan.
The assets in these so-called in-plan Roth accounts accrue earnings tax-free, can be matched by employer contributions, may be borrowed or withdrawn by participants under certain conditions and are distributed to retirees without being taxed. Employee contribution limits now in place for Roth 401(k)s are significantly higher than Roth individual retirement accounts, so the savings accumulated in them can become meaningful.
The conversion option ATRA brought about gives workers able to pay tax upfront on their retirement savings several new opportunities, including the chance for younger workers to shield at least some of their earnings from taxes as their income grows, and the possibility to use pretax and Roth amounts to balance and trim the tax burden they will face at retirement.
Many Eager to Offer In-Plan Roth Options
Aon Hewitt found many employers eager to consider or launch in-plan Roth options.
Of the respondents that currently allow Roth contributions but do not have an in-plan vehicle (32 percent), 53 percent said they are very or somewhat likely to add in-plan contributions. Of the 19 percent that already offer both kinds of Roth options, 79 percent said they are very or somewhat likely to expand in-plan conversions to non-distributable amounts.
Perhaps most importantly, among the nearly half of respondents with no Roth options, 29 percent told Aon Hewitt they would be very or somewhat likely to add them in the next 12 months.
However, among those that offer a Roth savings account but not an in-plan conversion feature, a large number said they were not expecting to add an in-plan Roth feature in the next 12 months (47 percent). Reasons for this ranged from waiting for competitive pressure and employee requests to drive adoption of such a plan to the desire to accept only low administrative complexity and cost in exchange for adding the option.
Among those who do not now include a Roth option, 57 percent said they needed to be sure that general Roth usage would be significant enough at their company to justify adding it. Findings are available from Aon Hewitt at www.aon.com.
To read the complete story on Thompson’s HR Compliance Expert, click here.
To learn more about after-tax contributions and Roth 401(k) requirements, see ¶222 in The 401(k) Handbook.
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