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Roth Feature in a 403(b) or Governmental 457(b) Plan – What Every Employer (and Financial Advisor) Needs to Know

By Carol Gransee, AVP, Oversight, Compliance Officer, Oppenheimer Funds

This article originally appeared in the January/February 2013 issue of NTSAA Market Beat. To view a PDF version of this article, please click HERE.

Adding a Roth salary deferral option to your plan is not as hard as you think. There are a number of valuable benefits for you as the employer and, of course, for your employees when a Roth option is incorporated into your retirement savings plan. And, there is a new tax law change (explained in detail below) that creates new opportunity and interest in permitting employees to select the Roth option for contributions, and, potentially, consider converting some of their current pre-tax savings to that option.

Let’s start from scratch with a basic explanation of the Roth option. All Roth employee salary deferral contributions are made on an after-tax basis. While employees pay taxes on their contribution amounts, their distributions, including earnings, are tax-free if they meet the eligibility requirements. That is a deal that is hard to beat. Note: Employer contributions cannot be directed into the Roth option; employer dollars are directed to the traditional account on a pre-tax basis. This option is available for all active and former participants with an account balance and spousal beneficiaries. This does not appear to be eligible for non-spouse beneficiaries.

To be eligible for a non-taxable distribution, a participant must be participating in the Roth plan for more than five years and have a qualifying event. Qualifying events in a 403(b) plan are death, disability and attainment of age 59 ½. 457 plan qualifying events for a non-taxable distribution are attainment of age 70 ½, death and disability.

Aside from the participant benefits, why would you as the employer want to offer this feature in your plan? Roth contributions are fast becoming a standard provision in a retirement plan as an employee retention and recruitment tool. The Roth option also has the potential to increase the participation rate within your existing employee population. Adding this feature demonstrates your ongoing commitment to helping employees achieve their retirement goals.

So, how do you add the Roth feature to the existing retirement plan? Refer to your plan document and see if Roth is an available option. If it is not, simply amend your plan document to include it. Then notify your TPA, check with the providers on their capabilities to support this and announce this great benefit to your employees.

For more details about the benefits of Roth or guidance to implement, contact your financial advisor.