CUNA Comment Letter

Designated Roth Contributions to 401(k) Plans

May 31, 2005

CC:PA:LPD:PR (REG-152354-04)
Room 5203
Internal Revenue Service
POB 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Designated Roth Contributions to Cash or Deferred Arrangements Under Section 401(k)

Dear Sir or Madam:

The Credit Union National Association (CUNA) is pleased to provide comments on the Internal Revenue Service’s (Service’s) proposal providing guidance regarding the requirements for designated Roth contributions to qualified cash or deferred arrangements under section 401(k) of the Internal Revenue Code (Code). Under the proposed regulations, a 401(k) plan may permit an employee who makes elective contributions under a qualified cash or deferred arrangement to designate some or all of those contributions as Roth contributions beginning in 2006. Although the Roth contributions could be included in employees' gross incomes and taxable at the time of the contribution, the plans' distributions would be tax-free. These proposed regulations implement Section 402A of the Code, which was added by the Economic Growth and Tax Relief Reconciliation Act of 2001. The proposed guidance also contains provisions to ensure that affected 401(k) plans comply with separate accounting and recordkeeping requirements under Section 402A. By way of background, CUNA is the largest credit union trade association, representing approximately 90% of our nation’s nearly 9,100 state and federal credit unions.

CUNA supports the guidance allowing Roth contributions to be included in 401(k) plans for several reasons. Given that there are no additional income restrictions on who can contribute to a Roth 401(k) plan and that there are higher contributions and catch-up limits available when compared to a Roth IRA (individual retirement account), we believe that the regulations would allow more credit union officials and staff to take advantage of the Roth option through automatic payroll deduction options of a 401(k) plan. Further, a Roth 401(k) plan would allow participants a wider array of investment options than they would have with a stand-alone IRA.

Summary of Comments

Discussion of Comments

Account Rollovers

The proposed guidance states the 401(k) plan must provide that designated Roth contributions may be rolled over only to another Roth 401(k) plan that accepts rollovers or to a Roth IRA.

Section 402A(d)(2)(B)(ii) of the Code states that a distribution from a Roth 401(k) account shall not be treated as a qualified distribution if the distribution is made within the 5- taxable-year period beginning the first taxable year for which the participant made a designated Roth contribution to the plan. If a rollover contribution was made to the Roth 401(k) account, the 5-year period starts to run beginning the first taxable year for which the individual made a designated Roth contribution to the previously established Roth plan. In the case of Roth IRAs, the 5-year period starts to toll with the first taxable year for which the participant made a contribution to the Roth IRA. (Section 408A(d)(2)(B) of the Code).

CUNA urges the Service to clarify the coordination between the five-year aging rules for Roth 401(k) plans and Roth IRAs. In the case of rollovers, we believe that the taxpayer should be responsible for keeping track of the holding period and that plan administrators and sponsors should be permitted to rely on reasonable participant representations as to when the first Roth 401(k) plan contribution was made.

Many plans have a mandatory waiting period (such as one year) before employees are eligible to start contributing to their employer’s 401(k) plan. We encourage the Service to confirm that employees can roll over Roth IRA assets into a Roth 401(k) plan before becoming a plan participant.

Minimum Distribution Rules

We request clarification on the interaction of the minimum distribution rules (Code Section 401(a)(9)) for Roth 401(k) plans and Roth IRAs, which are not subject to the minimum required distribution rules (meaning the individual is not required to withdraw any funds in the year in which he/she turns 70½). The proposed regulations state that Roth 401(k) plan contributions should be treated as elective deferrals for most purposes. Therefore, they are subject to the minimum required distribution rules. (Prop. Treas. Reg. § 1.401(k)-1(f)(3)). Consequently, it may be possible for a participant in a Roth 401(k) plan to avoid the plan’s required minimum distribution rules by rolling over his or her Roth 401(k) account to a Roth IRA.

Separate Accounting and Recordkeeping Requirements

We agree with the separate accounting and recordkeeping requirements in the proposed guidance. Under the proposed regulations, designated Roth contributions must be maintained by the plan in a separate account. In addition, the contributions and withdrawals of designated Roth contributions must be credited and debited to separate accounts maintained for employees who make the designations. Plan sponsors must also maintain records of the employee's investment contract for their Roth contribution accounts. Moreover, gains, losses, and other credits or charges are to be allocated separately "on a reasonable and consistent basis to the designated Roth contribution account and other accounts under the plan," but forfeitures may not be allocated to the accounts.

We request the IRS affirm in the final regulations that the requirement to maintain a separate account for a participant’s regular 401(k) plan contributions and Roth 401(k) plan contributions can be met by keeping separate records for each. The plan administrator or sponsor should be required to: make certain the participant’s contributions and earnings are properly allocated; keep intact the participant’s designated Roth contributions that have not been distributed; and keep payroll deductions for each type of contribution separate.

Loans to Participants

Participants in 401(k) plans may take out a loan from the plan for any reason at any age. In contrast, loans from Roth IRAs are not allowed. The proposed Roth 401(k) regulations are silent on whether assets rolled over from a Roth IRA to a 401(k) would be available for participant loans. We request clarification on this issue.

Model Plan Amendments

Credit unions and other organizations that wish to provide Roth 401(k) plans to their employees will have to amend their plans to comply with the regulations. In order to facilitate this process, the Service should publish model plan amendments which can be incorporated into existing 401(k) plan documents, including prototype plans, without affecting reliance on the prototype sponsor’s opinion letter.

We feel that many credit union employees will take advantage of the additional investment opportunities associated with of the Roth 401(k) plan. However, the law authorizing Roth 401(k) plans (Economic Growth and Tax Relief Reconciliation Act of 2001) will sunset at the end of 2010. If Roth 401(k) plans prove as successful and popular as many anticipate, we hope the IRS will ensure that Roth 401(k) plans can be offered long after 2010.

Thank you for the opportunity to comment. If you have any questions about this letter, please contact me by phone at (202) 508-6743 or by e-mail at


Catherine Orr
Senior Regulatory Counsel
Credit Union National Association