NOVEMBER 2005 Pension Plan tip of the month...

Roth after tax contributions into a 401(k) plan will be possible effective January 1, 2006. This feature may provide participants with tax and income flexibility while planning for their retirement. Your plan’s financial advisor can discuss specific tax and investment issues and help you decide if this feature would be useful to your plan’s participants.

If adopted, plan sponsors may find it prudent to delay the effective date 3 to 6 months before allowing Roth 401k contributions into their plan; this is a new feature and many record keepers, payroll providers, as well as the IRS itself, are still working through its details.

We’ve listed some basic requirements you should be aware of when considering whether to add this provision to your plan. You as plan sponsor, Paragon as your TPA, along with your payroll provider and record keeper/vendor will each have a role to play in implementing and maintaining this feature.

While we recommend you contact your payroll provider directly, Paragon will help you interface with your plan’s record keeper/vendor to confirm the following issues are being addressed;

• Will the investment provider have a modified Enrollment Form with a section to add Roth 401(k) contributions? Will your plan participants be able to learn the difference between  pre-tax and after tax deferrals during the time allowed in your plan  enrollment meetings?

• Will they be adding a new money source to accept Roth 401(k) contributions and the gains and losses generated from them?

• Will it be possible to electronically submit Roth 401(k) contributions from payroll onto a contribution template?

• Will the record keeper be able to track and store the date of the first contribution submitted for the Roth 5 year distribution rules? Roth 401(k) investment earnings must be in a plan at least 5 years from the first contribution to be eligible for tax free withdrawal.

• Will there be a modified Distribution Form so that participants can make individual elections for traditional 401(k) deferrals and from Roth 401(k) distributions so that the appropriate 1099R(s) can be issued? Will this form be easily understood by participants taking a distribution?

• Will systems be created so that a participant will be able to roll balances to another Roth 401(k) account or Roth IRA? Please note that any terminated participant wishing to roll their Roth 401(k) to another plan must confirm that their new plan allows for Roth 401(k)s 

For your part, as plan sponsor, you should contact your payroll provider regarding the following issues; 

• Payroll systems must be able to accommodate these contributions by withholding Roth 401(k) deductions from employees on an after tax basis.  
• They must be able to separate traditional 401(k) deferrals from Roth 401(k) contributions before submitting to record keepers.
• They must maintain the same timeliness of deposits as with other employee deferrals.
• If you currently have a matching contribution, you most likely will also match the Roth 401(k) deferral. Note: the match does not have to be segregated from your existing match since the tax treatment will be the same.

Some Important 401(k) Plan compliance issues Paragon will review for you are; 

• Your plan will have to be amended to allow for this feature.
• A Roth 401(k) contribution will NOT increase the amount a participant is able to defer from their pay during a calendar year. We will monitor this during our testing of your plan after year end census data is received.

• Roth 401(k) contributions are required to be included in all discrimination testing.
• The after tax status of Roth 401(k) contributions will not lessen the need for refunds should the plan fail ADP/ACP testing.
• Distributions from the plan must be processed carefully according to your plan’s provisions as well as IRS tax regulations to ensure the proper treatment of all contributions and earnings.

If you decide to add the Roth 401(k) provision to your plan, please notify us. Your plan will need to be amended by December 31, 2006 and plan participants must be informed of this new feature.  As soon as final language becomes available, Paragon will amend the plan for you. The one time cost for this amendment will be $300.00.

Due to the increased services needed (testing, consulting, data review and reporting) there will be an additional annual fee as follows:

Employees using Roth 401(k)                                           Additional Annual Fee

None                                                                                          No charge

1-20                                                                                            $250.00/year

21 or greater                                                                             Custom Quote                                                                      

We will work with our Plan document provider, software vendors and recordkeeping alliances to be prepared to offer this feature for plans that may benefit from it.