Roth 401(k) Plans
As Published in the July 2006, Issue of Best Practices in Compensation & Benefits
Adding Roth 401(k) Plan Not Difficult
Shannon O’Shaughnessy of Oasis Outsourcing says adding a Roth account to your 401(k) is not difficult. Her company, a Professional Employer Organization (PEO), provides human resources and payroll services to businesses, grouping them together to allow more attractive rates on health insurance, workers’ compensation, and other benefits. Adding a Roth account to their master 401(k) plan is simply a matter of amending the plan and making some minor changes in record-keeping. “Our Third-Party Administrator was already set up to allow this,” O’Shaughnessy explains. “Our financial institution was already set up to allow these types of contributions. The only other part was the plan amendment. I think a lot of people are knocking the Roth 401(k) because they think it’s going to be a huge project. It really isn’t, as long as the other parties involved are equipped to handle it.”
Keep in mind that the annual contributions limit of $15,000 applies to all employee deferrals – pre- and post-tax. Roth contributions are also subject to the usual nondiscrimination tests and could thus be limited. “Even so,” says O’Shaughnessy, “the real pay-off comes when the employee withdraws his or her money at retirement – with no taxes payable on the contributions or the earnings.”
A New Twist on an Old Favorite: The Roth 401(k)
In the ongoing effort to encourage employees to save for their retirements, you’ve most likely hit them with at least two of the three Rs: Reading, as in great communications, and ‘rithmatic, showing them how much they’ll accumulate if they start contributing today. We’d like to suggest that you add a third R. Not the one you’re thinking, though. Instead, consider a Roth.
For years, Americans have had the ability to contribute to a Roth Individual Retirement Account (IRA). A Roth IRA accepts after-tax contributions when the account holder has an adjusted gross income less than an annually adjusted limit – currently $110,000 for single filers and $160,000 for joint filers. The funds accumulate tax-free and are paid out the same way.
For many people, the Roth IRA is a much better deal in the long run than a traditional IRA. However, employees earning above the income limits are unable to contribute to a Roth IRA, and those earning a little less ($95,000 for single filers and $150,000 for joint filers) can’t contribute the full amount.
Even those who can make a full contribution to a Roth IRA are limited in their ability to save. In 2006, the contribution limit is $4,000 per person, unless the contributor is close to retirement and, therefore, subject to catch-up contribution rules, which allow slightly higher limits.
But not so with Roth 401(k)s, which became available on January 1, 2006 as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Now, with a simple amendment, and a bit more record-keeping, 401(k) plans can allow for after-tax contributions that will accumulate in much the same way as a Roth IRA.
However, the contribution limits in a Roth 401(k) are much higher and apply equally to everyone, no matter their adjusted gross income. “The limits are a lot higher in a Roth 401(k),” says Shannon O’Shaughnessy, 401(k) manager at Oasis Outsourcing (www.oasisadvantage.com). “You can only contribute $4,000 to a Roth IRA for 2006, but you can contribute $15,000 in a Roth 401(k).”
O’Shaughnessy believes companies can encourage employees who have been sitting on the 401(k) sidelines to join their plan by communicating the benefits of the Roth 40(k) account.
“We’re going to do a mailing to all participants who aren’t currently in the plan but who are eligible,” she says. “There is a large population out there, and we’re hoping that maybe this will get more people involved in saving for their retirement in the 401(k) plan. I have to say this is probably the best thing that has happened to 401(k)s in a long time.”
