Roth 401(k)s.

• Author: Laffie, Lesli S.

The IRS has issued final regulations (TD 9237, 1/3/06) on designating elective contributions to a Sec. 401(k) plan as Roth contributions.

Employees who participate in a Sec. 401(k) plan can choose to make elective contributions. Such contributions are generally not included in gross income when contributed ("pre-tax elective contributions"). As of Jan. 1, 2006, employees who make elective contributions to a Sec. 401(k) plan can designate some or all of these contributions as Roth contributions. Designated Roth contributions are elective contributions, but not pre-tax elective contributions, because designated Roth contributions are includible in gross income when contributed. However, when designated Roth contributions are later distributed, any qualified distributions are excludible from the recipient's gross income. The regulations clarify that, to provide for designated Roth contributions, a qualified cash or deferred arrangement (CODA) must also offer pre-tax elective contributions.

Definition: The final regulations define a designated Roth contribution as an elective contribution under a qualified CODA that is (1) designated irrevocably by the employee at the time of the cash or deferred election as a designated Roth contribution; (2) treated by the employer as includible in the employee's income at the time the employee would have received the amount in cash if he or she had not made the cash or deferred election; and (3) maintained by the plan in a separate account.

Contributions are treated as designated...