Notice 2011-72: In-Plan Roth Rollover Rules
Understand IRS Notice 2011-72, the official guidance establishing the tax and administrative framework for in-plan Roth rollovers in retirement plans.
IRS Notice 2011-72 provides guidance for in-plan Roth rollovers, a transaction first authorized by the Small Business Jobs Act of 2010. This created a way for employees to convert pre-tax retirement savings into post-tax Roth savings within the same plan. Subsequent legislation expanded these rollover options, making them available for a wider range of contribution types. The rules apply to common workplace retirement plans with a designated Roth feature, including 401(k)s, 403(b)s, and governmental 457(b) plans.
Key Rules for In-Plan Roth Rollovers
Eligibility for an in-plan Roth rollover depends on the status of the funds in the account. The first path allows for the rollover of any funds that are already distributable under the plan’s terms. This includes funds available to participants who have reached age 59½, separated from service, or become disabled.
A second pathway allows for the rollover of funds that are not otherwise distributable. This means an active employee younger than 59½ could perform an in-plan rollover if their employer’s plan allows it. This option applies to any vested amounts, which are funds the employee has an unconditional right to. This includes their own contributions and vested employer contributions like matching, profit-sharing, and safe harbor funds.
The main tax consequence of an in-plan Roth rollover is the immediate recognition of income. The pre-tax amount of the rolled-over funds must be included in the employee’s gross income for the tax year the rollover occurs. For instance, rolling over $50,000 in pre-tax funds adds that amount to the employee’s taxable income for the year. This can create a significant tax liability, and individuals may need to make estimated tax payments to avoid underpayment penalties.
Converted funds retain their original withdrawal restrictions, meaning the act of converting money to Roth does not make it immediately accessible. If an employee converts funds that were not yet eligible for distribution, those same funds in the Roth account cannot be withdrawn until a distributable event occurs. This rule prevents the in-plan rollover from being used as a method to bypass rules for accessing retirement funds before eligibility.
Plan Administration and Reporting
For an employer to offer in-plan Roth rollovers, the plan document must be formally amended, as this is an optional provision. The amendment updates the plan’s rules to describe the availability of these rollovers, which types of contributions are eligible, and the procedures employees must follow.
For a direct in-plan Roth rollover, where funds move between accounts within the same plan, mandatory 20% income tax withholding is not required. However, if the rollover is done indirectly, where the employee receives a check, the 20% withholding applies. The employee would then need to use other funds to complete the full rollover amount to avoid having the withheld portion treated as a taxable distribution.
Plan administrators report in-plan Roth rollovers on Form 1099-R. The total rollover amount is reported in Box 1 and the taxable amount in Box 2a. The administrator enters code “G” in Box 7, which indicates a direct rollover. This code signals to the IRS that the funds were moved within the plan, which avoids the 10% early withdrawal penalty.