From Senate Report 106-411
RETIREMENT SECURITY AND SAVINGS ACT OF 2000
A qualified cash or deferred arrangement ('section 401(k) plan') or a
tax-sheltered annuity ('section 403(b) annuity') may permit a participant to
elect to have the employer make payments as contributions to the plan or to the
participant directly in cash. Contributions made to the plan at the election of
a participant are elective deferrals. Elective deferrals must be nonforfeitable
and are subject to an annual dollar limitation (sec. 402(g)) and distribution
restrictions. In addition, elective deferrals under a section 401(k) plan are
subject to special nondiscrimination rules. Elective deferrals (and earnings
attributable thereto) are not includible in a participant's gross income until
distributed from the plan.
Individuals with adjusted gross income below certain levels generally may make
nondeductible contributions to a Roth IRA and may convert a deductible or
nondeductible IRA into a Roth IRA. Amounts held in a Roth IRA that are withdrawn
as a qualified distribution are neither includible in income nor subject to the
additional 10-percent tax on early withdrawals. A qualified distribution is a
distribution that (1) is made after the 5-taxable year period beginning with the
first taxable year for which the individual made a contribution to a Roth IRA,
and (2) is made after attainment of age 59 1/2 , is made on account of death or
disability, or is a qualified special purpose distribution (i.e., for first-time
homebuyer expenses of up to $10,000). A distribution from a Roth IRA that is not
a qualified distribution is includible in income to the extent attributable to
earnings, and is subject to the 10-percent tax on early withdrawals (unless an
exception applies). 17
[Footnote]
[Footnote 17: Early distributions of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the 4-year rule
applicable to 1998 conversions.]
The recently-enacted Roth IRA provisions have provided individuals with another form of tax-favored retirement savings. For a variety of reasons, some individuals may prefer to save through a Roth IRA rather than a traditional deductible IRA. The Committee believes that similar savings choices should be available to participants in section 401(k) plans and tax-sheltered annuities.
A section 401(k) plan or a section 403(b) annuity is permitted to include a
`qualified Roth contribution program' that permits a participant to elect to
have all or a portion of the participant's elective deferrals under the plan
treated as designated Roth contributions. Designated Roth contributions are
elective deferrals that the participant designates (at such time and in such
manner as the Secretary may prescribe) 18 [Footnote] as not excludable from the participant's gross income.
[Footnote 18: It is intended that the Secretary will generally not permit
retroactive designations of elective deferrals as Roth contributions.]
The annual dollar limitation on a participant's designated Roth contributions is
the section 402(g) annual limitation on elective deferrals, reduced by the
participant's elective deferrals that the participant does not designate as
designated Roth contributions. Designated Roth contributions are treated as any
other elective deferral for purposes of nonforfeitability requirements and
distribution restrictions. 19 [Footnote] Under a section 401(k) plan, designated Roth contributions also are
treated as any other elective deferral for purposes of the special
nondiscrimination requirements. 20 [Footnote]
[Footnote 19: Similarly, Roth contributions to a section 403(b) annuity are
treated the same as other salary reduction contributions to the annuity (except
that Roth contributions are includible in income).]
[Footnote 20: It is intended that the Secretary will provide ordering rules
regarding the return of excess contributions under the special nondiscrimination
rules (pursuant to sec. 401(k)(8)) in the event a participant has made both
regular elective deferrals and Roth contributions. It is intended that such
rules will generally permit a plan to allow participants to designate which
contributions are returned first or to permit the plan to specify which
contributions are returned first.]
The plan would be required to establish a separate account, and maintain
separate recordkeeping, for a participant's designated Roth contributions (and
earnings allocable thereto). A qualified distribution from a participant's
designated Roth contributions account would not be includible in the
participant's gross income. A qualified distribution is a distribution that is
made after the end of a specified nonexclusion period and that is (1) made on or
after the date on which the participant attains age 59 1/2 , (2) made to a
beneficiary (or to the estate of the participant) on or after the death of the
participant, or (3) attributable to the participant's being disabled. 21 [Footnote] The nonexclusion period is the 5-year-taxable period beginning with
the earlier of (1) the first taxable year for which the participant made a
designated Roth contribution to any designated Roth contribution account
established for the participant under the plan, or (2) if the participant has
made a rollover contribution to the designated Roth contribution account that is
the source of the distribution from a designated Roth contribution account
established for the participant under another plan, the first taxable year for
which the participant made a designated Roth contribution to the previously
established account.
[Footnote 21: A qualified special purpose distribution, as defined under the
rules relating to Roth IRAs, does not qualify as a tax-free distribution from a
designated Roth contributions account.]
A distribution from a designated Roth contributions account that is a corrective
distribution of an elective deferral (and income allocable thereto) that exceeds
the section 402(g) annual limit on elective deferrals or a distribution of
excess contributions (and income allocable thereto) is not is a qualified
distribution. 22 [Footnote]
[Footnote 22: Such distributions are not includible in income to the extent they
are a return of Roth contributions, because the initial contribution is
includible in income.]
A participant is permitted to roll over a distribution from a designated Roth
contributions account only to another designated Roth contributions account or a
Roth IRA of the participant.
The Secretary of the Treasury is directed to require the plan administrator of
each section 401(k) plan or section 403(b) annuity that permits participants to
make designated Roth contributions to make such returns and reports regarding
designated Roth contributions to the Secretary, plan participants and
beneficiaries, and other persons that the Secretary may designate.
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