Federal Register / Vol. 72, No. 82 / Monday, April 30, 2007 / Rules and Regulations 21103 

(i) Before January 1, 2002, the 

claimant’s net earnings in a month were 

more than the amount(s) indicated in 

Table 2 of this section for the year(s) in 

which the claimant worked, or the 

hours the claimant worked in the 

business in a month are more than the 

number of hours per month indicated in 

Table 2 for the years in which the 

claimant worked. 

(ii) Beginning January 1, 2002, the 

claimant worked more than 80 hours a 

month in the business, or the claimant’s 

net earnings in a month are more than 

an amount determined for each calendar 

year to be the larger of: 

(A) Such amount for the previous 

year, or 

(B) The amount established by the 

Social Security Administration for such 

year as constituting the amount of 

monthly earnings used to determine 

whether a person has performed 

services for counting trial work period 

months. 

TABLE 1.—FOR NON SELFEMPLOYED

For months You earn more 

than 

In calendar years before 

1979 .................................. $50 

In calendar years 1979–1989 75 

In calendar years 1990–2000 200 

In calendar year 2001 .......... 530 

TABLE 2.—FOR THE SELF-EMPLOYED

For months 

Your net earnings are more 

than 

Or you work in 

the business 

more than 

(hours) 

In calendar years before 1979 ................................................................................................................................ $50 15 

In calendar years 1979–1989 .................................................................................................................................. 75 15 

In calendar years 1990–2000 .................................................................................................................................. 200 40 

In calendar year 2001 .............................................................................................................................................. 530 80 

* * * * * 

Dated: April 24, 2007. 

By Authority of the Board. 

Beatrice Ezerski, 

Secretary to the Board. 

[FR Doc. E7–8155 Filed 4–27–07; 8:45 am] 

BILLING CODE 7905–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9324] 

RIN 1545–BF04 

Designated Roth Accounts Under 

Section 402A 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final Regulations. 

SUMMARY: This document contains final 

regulations under sections 401(k), 

402(g), 402A, and 408A of the Internal 

Revenue Code (Code) relating to 

designated Roth accounts. These final 

regulations provide guidance 

concerning the taxation of distributions 

from designated Roth accounts under 

qualified cash or deferred arrangements 

under section 401(k). These final 

regulations will affect administrators of, 

employers maintaining, participants in, 

and beneficiaries of section 401(k) and 

section 403(b) plans, as well as owners 

and beneficiaries of Roth IRAs and 

trustees of Roth IRAs. 

DATES: Effective Date: These final 

regulations are effective April 30, 2007. 

Applicability Date: These regulations 

generally apply to taxable years 

beginning on or after January 1, 2007. 

For dates of applicability, see 

§§ 1.401(k)–1(f)(6), 1.402A–1, A–15, 

1.402A–2, A–4 and 1.408A–10, A–6. 

FOR FURTHER INFORMATION CONTACT: R. 

Lisa Mojiri-Azad or William D. Gibbs at 

202–622–6060, or Cathy A. Vohs, 202–

622–6090 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in these final regulations was 

reviewed and approved by the Office of 

Management and Budget (OMB) for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)) under control number 

OMB–1545–1992. 

The collection of information in these 

final regulations is in 26 CFR 1.402A–

2. This information is required to 

comply with the separate accounting 

and recordkeeping requirements of 

section 402A. This information will be 

used by the IRS and employers 

maintaining designated Roth accounts 

to insure compliance with the 

requirements of section 402A. The 

collection of information is required to 

obtain a benefit. The likely 

recordkeepers are state or local 

governments, business or other forprofit institutions, nonprofit 

institutions, and small businesses or 

organizations. 

The estimated annual burden per 

respondent under control number 

OMB–1545–1992 is 2.3 hours. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document contains final 

regulations under section 402A, and 

amendments to regulations under 

sections 401(k), 402(g), and 408A of the 

Internal Revenue Code. Section 402A, 

which sets forth rules for designated 

Roth contributions, was added to the 

Code by section 617(a) of the Economic 

Growth and Tax Relief Reconciliation 

Act of 2001, Public Law 107–16 (115 

Stat. 103) (EGTRRA), effective for 

taxable years beginning after December 

31, 2005. These final regulations also 

reflect certain provisions of the Pension 

Protection Act of 2006, Public Law 109–

280, (120 Stat. 780) (PPA ’06), including 

section 811 of PPA ’06, which repealed 

the sunset provisions of EGTRRA with 

respect to section 402A. 

Section 401(k) sets forth rules for 

qualified cash or deferred arrangements 

under which an employee may make an 

election between cash and an employer 

contribution to a plan qualified under 

section 401(a). Section 403(b) permits a 

similar salary reduction agreement 

under which payments are made to a 

section 403(b) plan. Section 402(e)(3) 

provides that an amount is not 


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includible in an employee’s income 

merely because the employee has an 

election whether these contributions 

will be made to the trust or annuity or 

received by the employee in cash. 

Amounts contributed pursuant to 

these qualified cash or deferred 

arrangements and salary reduction 

agreements are defined in section 

402(g)(3) as elective deferrals. Section 

402(g)(1) provides a limit on the amount 

of elective deferrals that may be 

excluded from an employee’s income 

for a taxable year. Section 402(g)(2) 

provides for the distribution of elective 

deferrals that exceed the annual limit on 

elective deferrals (an excess deferral). 

A designated Roth contribution is an 

elective deferral, as described in section 

402(g)(3)(A) or (C), that has been 

designated by an employee, pursuant to 

section 402A, as not excludable from 

the employee’s gross income. Under 

section 402A(b)(2), designated Roth 

contributions must be maintained by the 

plan in a separate account (a designated 

Roth account). 

Under section 402(a), a distribution 

from a plan qualified under section 

401(a) is taxable under section 72 to the 

distributee in the taxable year 

distributed. However, pursuant to 

section 402A(d)(1), a qualified 

distribution from a designated Roth 

account is excludable from gross 

income. A qualified distribution is 

defined in section 402A(d)(2) as a 

distribution that is made after 

completion of a specified 5-year period 

and the satisfaction of other specified 

requirements. 

If the distribution is not a qualified 

distribution, pursuant to section 72, the 

distribution is included in the 

distributee’s gross income to the extent 

allocable to income on the contract and 

excluded from gross income to the 

extent allocable to investment in the 

contract (basis). The amount of a 

distribution allocated to investment in 

the contract is generally determined by 

applying to the distribution the ratio of 

the investment in the contract to the 

account balance. 

Section 402(c) provides rules under 

which certain distributions from a plan 

qualified under section 401(a) may be 

rolled over into another eligible 

retirement plan. In such a case, the 

distribution is not currently includible 

in the distributee’s gross income. Under 

section 402(c)(2), as amended by section 

822 of PPA ’06, to the extent some or all 

of the distribution from a plan qualified 

under section 401(a) would not have 

been includible in gross income if it 

were not rolled over, that portion of the 

distribution can only be rolled over into 

an individual retirement plan, or 

through a direct rollover to another 

qualified plan or section 403(b) plan 

that agrees to separately account for 

such rolled over amounts. Section 

403(b)(8)(B) provides that the rules of 

section 402(c)(2) also apply for purposes 

of the rollover rules under section 

403(b)(8). 

Under section 402(c)(8) and 

402A(c)(3), a distribution from a 

designated Roth account can be rolled 

over only to another designated Roth 

account or to a Roth IRA. Under section 

408A, a Roth IRA is a type of individual 

retirement plan (IRA) under which 

contributions are never deductible and 

qualified distributions are excludable 

from gross income. Section 408A(d)(4) 

sets forth special ordering rules for the 

return of basis in the case of a 

distribution from a Roth IRA. Under the 

section 408A(d)(4) ordering rules, in a 

nonqualified distribution from a Roth 

IRA, basis is recovered before income. 

Section 617(d) of EGTRRA amended 

section 6051(a)(8) to require the 

reporting of designated Roth 

contributions on Form W–2, ‘‘Wage and 

Tax Statement,’’ and added a new 

subsection (f) to section 6047 to require 

plan administrators or other responsible 

persons of section 401(k) or 403(b) plans 

to make such returns and reports 

regarding designated Roth contributions 

to the Secretary of the Treasury and 

such other persons the Secretary may 

prescribe. 

Final regulations under section 401(k) 

were issued on December 29, 2004 (69 

FR 78144). Those final regulations 

reserved § 1.401(k)–1(f) for special rules 

for designated Roth contributions. On 

January 3, 2006, final regulations were 

issued that fill in that reserved 

paragraph and provide additional rules 

applicable to designated Roth 

contributions (71 FR 6). The provisions 

of the final regulations under section 

401(k) regarding designated Roth 

contributions do not address the 

taxability of distributions from 

designated Roth accounts or the 

reporting requirements that apply to 

contributions of designated Roth 

contributions or distributions from the 

accounts. 

On January 26, 2006, a notice of 

proposed rulemaking (REG–146459–05) 

under section 402A was published in 

the Federal Register (71 FR 4322). The 

proposed regulations also would have 

provided guidance with respect to 

designated Roth contributions under 

section 403(b) plans by amending the 

proposed regulations under section 

403(b), published in the Federal 

Register on November 16, 2004 (69 FR 

67075). This guidance has not been 

finalized in this Treasury Decision, but 

will instead be included in the final 

regulations under section 403(b). 

Written comments responding to the 

notice of proposed rulemaking under 

section 402A were received. A public 

hearing was held on July 26, 2006. After 

consideration of all comments, these 

final regulations adopt the provisions of 

the proposed regulations with certain 

modifications, the most significant of 

which are highlighted below. 

These final regulations under section 

402A are intended to provide 

comprehensive guidance on the taxation 

of distributions from designated Roth 

accounts under section 401(k) and 

section 403(b) plans. These regulations 

also provide guidance on the reporting 

requirements with respect to these 

accounts and include amendments to 

the provisions of the final section 401(k) 

regulations relating to designated Roth 

contributions. In addition, these final 

regulations include amendments to the 

regulations under section 402(g) issued 

in 1991 in order to reflect the enactment 

of section 402A (as well as other 

statutory changes since those 

regulations were issued) and to make 

changes to conform the regulations 

under section 402(g) to the final section 

401(k) regulations. These final 

regulations also add a new § 1.408A–10 

to the existing regulations under section 

408A for Roth IRAs (§ 1.408A–1 through 

9) issued in 1999 to reflect the 

interaction between section 408A and 

section 402A. 

Explanation of Provisions 

Overview 

These final regulations, like the 

proposed regulations, provide guidance 

on the taxation of distributions from 

designated Roth accounts and other 

related issues. A designated Roth 

account is a separate account under a 

section 401(k) plan or section 403(b) 

plan to which designated Roth 

contributions are made, and for which 

separate accounting of contributions, 

gains, and losses are maintained. These 

final regulations retain the rule from the 

proposed regulations that any 

transaction or accounting methodology 

involving an employee’s designated 

Roth account and any other accounts 

under the plan or plans of an employer 

that has the effect of directly or 

indirectly transferring value from 

another account into the designated 

Roth account violates the separate 

accounting requirement under section 

402A. 

The taxation of a distribution from a 

designated Roth account depends on 

whether or not the distribution is a 

qualified distribution. A qualified 


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distribution from a designated Roth 

account is not includible in the 

employee’s gross income. A qualified 

distribution is generally a distribution 

that is made after a 5-taxable-year 

period of participation and that either 

(1) is made on or after the date the 

employee attains age 591⁄2, (2) is made 

after the employee’s death, or (3) is 

attributable to the employee’s being 

disabled within the meaning of section 

72(m)(7). In response to comments, 

these final regulations clarify that, in the 

case of distribution to an alternate payee 

or beneficiary, the age, death or 

disability of the participant are used to 

determine whether the distribution is 

qualified. The only exception is in the 

case of a rollover by an alternate payee 

or surviving spouse to a designated Roth 

account under a plan of his or her own 

employer. 

Determination of 5-Taxable-Year Period 

for Qualified Distributions 

In order for a distribution from a 

designated Roth account to be a 

qualified distribution and thus not 

includible in gross income, a 5-taxableyear requirement must be satisfied. 

These final regulations, like the 

proposed regulations, reflect the rule in 

section 402A that the 5-taxable-year 

period during which a distribution is 

not a qualified distribution begins on 

the first day of the employee’s taxable 

year for which the employee first had 

designated Roth contributions made to 

the plan and ends when 5 consecutive 

taxable years have been completed. 

However, if a direct rollover is made 

from a designated Roth account under 

another plan, the 5-taxable-year period 

for the recipient plan begins on the first 

day of the employee’s taxable year for 

which the employee first had designated 

Roth contributions made to the other 

plan, if earlier. 

Commentators inquired as to when 

designated Roth contributions made by 

a reemployed veteran for a year of 

qualified military service pursuant to 

section 414(u), are treated as made for 

purposes of the 5-taxable-year period of 

participation. In response to these 

comments, the final regulations provide 

that designated Roth contributions made 

by a reemployed veteran are treated as 

made in the taxable year with respect to 

which the contributions relate. 

Reemployed veterans may identify the 

year for which a contribution is made 

for other purposes, such as for 

entitlement to a match, and the 

treatment for the five year period of 

participation rule follows that 

identification. Absent such an 

identification, for purposes of 

determining the first year of the five 

years of participation under section 

402A(d)(2)(B), the contribution is 

treated as made in the veteran’s first 

taxable year in which the veteran’s 

qualified military service begins, or if 

later, the first taxable year in which 

designated Roth contributions could be 

made under the plan. 

Commentators asked how the 5- 

taxable-year period of participation rule 

applies to a required minimum 

distribution made for an earlier year, 

such as a distribution made on April 1 

following the year an employee attains 

age 701⁄2. They also asked whether, if 

payments under an annuity stream 

commence before a qualifying event, the 

payments after the qualifying event 

could be qualified distributions 

(assuming the 5-year period of 

participation is satisfied). The 

determination of whether a payment is 

a qualified distribution is determined 

based upon the actual year of the 

payment from the account and does not 

take into account whether the payment 

is part of a series of distributions or 

whether the payment is attributable to a 

prior calendar year. 

In response to comments, these final 

regulations provide that certain 

contributions do not start the 5-taxableyear period of participation. For 

example, a year in which the only 

contributions consist of excess deferrals 

will not start the 5-taxable-year period 

of participation. Further, excess 

contributions that are distributed to 

prevent an ADP failure also do not begin 

the 5-taxable-year period of 

participation. Finally, contributions 

returned to the employee pursuant to 

section 414(w) also do not start the 5- 

taxable-year period of participation. 

Taxation of Nonqualified Distributions 

These final regulations retain the 

rules from the proposed regulations for 

taxation of nonqualified distributions 

and provide that a distribution from a 

designated Roth account that is not a 

qualified distribution is taxable to the 

distributee under section 402 (or section 

403(b)(1)), treating the designated Roth 

account as a separate contract under 

section 72. In applying that treatment, 

the portion of any distribution that is 

includible in gross income as an amount 

allocable to income on the contract and 

the portion not includible in income as 

an amount allocable to investment in 

the contract is generally determined 

under section 72(e)(8) (or, in the case of 

an amount received as an annuity, 

section 72 (b) or (d), as applicable). 

Some commentators requested that 

the special ordering rules in section 

408A(d), which provide that the first 

distributions from a Roth IRA are a 

return of contributions (and thus not 

includible in gross income) until all 

contributions have been returned as 

basis, be applied to distributions from a 

designated Roth account. They noted 

that a pro rata basis recovery rule in 

section 72 is difficult to explain to 

employees receiving a hardship 

distribution from a designated Roth 

account because the entire distribution 

reduces the amount of elective 

contributions (including designated 

Roth contributions) available for 

hardship distribution while, for 

purposes of determining the amount 

includible in income under sections 

402(a) and 72, only a portion of the 

distribution is treated as recovery of 

basis attributable to the designated Roth 

contributions. 

As noted in the preamble to the 

proposed regulations, because section 

402A does not provide that the special 

ordering rules of section 408A(d) apply 

to distributions from designated Roth 

accounts, these final regulations do not 

apply those special ordering rules. 

Although designated Roth contributions 

to a designated Roth account bear some 

similarity to contributions to a Roth IRA 

(e.g., contributions to either type of 

account are after-tax contributions, and 

qualified distributions from either type 

of account are excludable from gross 

income), there are many differences 

between these types of arrangements. 

The only special rule under section 

402A for nonqualified distributions 

from a designated Roth account is that 

the account is treated as a separate 

contract for purposes of section 72. 

Thus, these final regulations do not 

apply the basis recovery rules in section 

408A to distributions from designated 

Roth accounts. Furthermore, the limit 

on elective contributions available for 

hardship distribution is an aggregate 

limit that takes into account both pretax elective contributions and 

designated Roth contributions. For 

example, an employee could take all 

hardship distributions from the pre-tax 

account, even though part of the amount 

available for hardship is attributable to 

designated Roth contributions. Thus, 

the amount of elective deferrals 

available for distribution from a 

designated Roth account on account of 

hardship generally would be a different 

amount than the total designated Roth 

contributions even if the ordering rule 

in section 408A(d)(4) applied to 

distributions from designated Roth 

accounts. 

Rollover of Designated Roth 

Contributions 

As described above in the Background 

section of this preamble, section 


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1For distributions from designated Roth 

accounts, there is the same need for proper 

accounting of investment in the contract as for 

distributions from other accounts that include aftertax contributions. In addition, it is necessary to 

track whether the employee has satisfied the 5-year 

rule for qualified distributions. 

2The proposed regulations would have reflected 

the rule in section 402(c)(2) prior to amendment by 

PPA ‘06 that limited rollovers of distributions from 

qualified plans that are not includible in gross 

income to direct rollovers to other qualified trusts 

and not to section 403(b) plans. These final 

regulations do not retain this restriction on 

rollovers because of the amendments to section 

402(c) made by section 822 of PPA ‘06. 

3 If the investment in the contract exceeds the 

account balance and the entire account balance is 

distributed (and not rolled over), see Rev. Rul. 72–

305, 1972–1 C.B. 116, for guidance concerning a 

deduction for the difference. 

402(c)(2), after amendment by section 

822 of PPA ‘06, provides that, if a 

portion of the distribution from a plan 

qualified under section 401(a) is not 

includible in income (determined 

without regard to the rollover), that 

portion of the distribution can only be 

rolled over by a direct rollover of the 

distribution to another qualified plan, or 

to a section 403(b) plan, that provides 

for separate accounting for amounts 

transferred (and earnings thereon) 

including separate accounting for the 

portion of such distribution which is 

includible in gross income and the 

portion of such distribution that is not 

so includible. Alternatively, the 

distribution can be rolled over to an IRA 

in either a 60-day rollover or direct 

rollover. 

Section 402A(c)(3) provides that a 

rollover contribution of a distribution 

from a designated Roth account may 

only be made to the extent it is 

otherwise allowable. Section 402(c)(2) 

provides rules regarding when a rollover 

contribution of amounts not includable 

in gross income are allowable. As noted 

in the preamble to the proposed 

regulations, the IRS and Treasury 

Department believe that the rules in 

section 402(c)(2) relating to the rollover 

of a distribution of an amount not 

includable in gross income apply to a 

distribution from a designated Roth 

account.1 Thus, these regulations retain 

the rule in the proposed regulations 

that, in order to roll over any portion of 

the basis in a designated Roth account 

into a designated Roth account under 

another plan, the rollover of the 

distribution must be accomplished 

through a direct rollover (i.e., a rollover 

to another designated Roth account is 

not available for the portion of the 

distribution not includible in gross 

income if the distribution is made 

directly to the employee). However, for 

purposes of these regulations, the 

requirement that the receiving plan 

separately account for designated Roth 

contributions that are rolled over has 

been eliminated because such 

contributions are independently subject 

to the separate account requirement of 

Treas. Reg. § 1.401(k)–1(f).2

In response to comments, the final 

regulations clarify that, for purposes of 

these regulations, if any amount is paid 

as a direct rollover, that amount is 

treated as a separate distribution from 

any amount paid directly to the 

distributee for purposes of applying 

section 402(c)(2). Finally, to insure that 

there is proper accounting in the 

recipient plan, as described under the 

heading Reporting and Recordkeeping, 

these final regulations retain the 

provision in the proposed regulations 

requiring the distributing plan making 

the direct rollover is required to report 

the amount of the investment in the 

contract and the first year of the 5-year 

period to the recipient plan so that the 

recipient plan will not need to rely on 

information from the distributee. 

In response to comments, the 

definition of designated Roth account 

has been revised to clarify that the 

definition only includes accounts under 

a plan to which designated Roth 

contributions are made in lieu of 

elective contributions or deferrals. Thus, 

the final regulations clarify that a 

distribution from a designated Roth 

account may only be rolled over to a 

section 401(k) plan or section 403(b) 

plan if that has a designated Roth 

program. 

As in the proposed regulations, the 

final regulations provide that if the 

entire amount of a distribution from a 

designated Roth account is rolled over 

to another designated Roth account, the 

amount of the rollover contribution 

allocated to investment in the contract 

in the recipient designated Roth account 

is the amount that would not have been 

includible in gross income (determined 

without regard to section 402(e)(4)) if 

the distribution had not been rolled 

over. Thus, if an amount that is a 

qualified distribution is rolled over, the 

entire amount of the rollover 

contribution is allocated to investment 

in the contract. In response to 

comments, the final regulations clarify 

that, if the entire account balance of a 

designated Roth account is rolled over 

to another designated Roth account, 

and, at the time of the distribution, the 

investment in the contract exceeds the 

balance in the designated Roth account, 

the investment in the contract in the 

distributing plan is included in the 

investment in the contract of the 

recipient plan.3

If a distribution from a designated 

Roth account is made to an employee, 

the employee is still able to roll over the 

entire amount (or any portion thereof) 

into a Roth IRA within a 60-day period. 

Under section 402(c)(2), if only a 

portion of the distribution is rolled over, 

the portion that is rolled over is treated 

as consisting first of the amount of the 

distribution that is includible in gross 

income. These final regulations, like the 

proposed regulations, provide that the 

income limits for contributions for Roth 

IRAs do not apply for this purpose. 

Alternatively, the proposed 

regulations provided that the employee 

is permitted to roll over the taxable 

portion of the distribution to a 

designated Roth account within a 60- 

day period. In such a case, additional 

reporting is required from the recipient 

plan, as described below under the 

heading Reporting and Recordkeeping. 

In addition, the employee’s period of 

participation under the distributing plan 

is not carried over to the recipient plan 

for purposes of determining whether the 

employee satisfies the 5-taxable-year 

requirement under the recipient plan. 

Commentators objected to this different 

treatment for indirect rollover 

contributions claiming that it reduces 

portability. The IRS and Treasury 

Department believe that this rule is 

more consistent with the statutory 

language and will further encourage 

direct rollover of distributions from 

designated Roth accounts which will 

reduce leakage of these distributions 

from retirement savings solution. Thus, 

this rule is retained in the final 

regulations. However, the final 

regulations provide that such an 

indirect rollover contribution starts the 

5-taxable-year period of participation 

under the receiving plan for a 

participant who has made no prior 

designated Roth contributions to that 

plan. 

Determination of 5-Taxable-Year Period 

After a Rollover to a Roth IRA 

Section 402A and section 408A each 

provide for a 5-taxable-year period that 

must be completed in order for a 

distribution from a designated Roth 

account or a Roth IRA to be a qualified 

distribution. However, each of these 

sections contains different rules for 

determining when the 5-taxable-year 

requirement is satisfied. Generally, 

under section 402A, satisfaction of the 

5-taxable-year requirement with respect 

to a designated Roth account under a 

plan is based on the years since a 

designated Roth contribution was first 

made by the employee under that plan. 

In contrast, the 5-year period under 

section 408A begins with the first 


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taxable year for which a contribution is 

made to any Roth IRA. 

Commentators suggested that, if a 

distribution from a designated Roth 

account to an individual is rolled into 

a Roth IRA, the individual receive credit 

under the 5-year rule in section 408A 

for the years since the individual first 

made a contribution to a designated 

Roth account. As noted in the preamble 

to the proposed regulations, the IRS and 

Treasury Department do not believe that 

the Code provides for this interaction 

between the two 5-year rules. Thus, 

these final regulations retain the rule 

under the proposed regulations that the 

5-taxable-year period described in 

section 402A and the 5-taxable-year 

period described in section 

408A(d)(2)(B) are determined 

independently. Thus, in the case of a 

rollover of a distribution from a 

designated Roth account maintained 

under a section 401(k) or 403(b) plan to 

a Roth IRA, the final regulations, like 

the proposed regulations, provide that 

the period that the rolled-over funds 

were in the designated Roth account 

does not count towards the 5-taxableyear period for determining qualified 

distributions from the Roth IRA. 

However, if an individual had 

established a Roth IRA in a prior year, 

the 5-year period for determining 

qualified distributions from a Roth IRA 

that began as a result of that earlier Roth 

IRA contribution applies to any 

distributions from the Roth IRA 

(including a distribution of an amount 

attributable to a rollover contribution 

from a designated Roth account). 

If a nonqualified distribution from a 

designated Roth account is rolled over 

into a Roth IRA, the portion of the 

distribution that constitutes a 

nontaxable return of investment in the 

contract is treated as basis in the Roth 

IRA. However, the final regulations, like 

the proposed regulations, provide that, 

if a qualified distribution from a 

designated Roth account is rolled over 

into a Roth IRA, the entire amount of 

the distribution will be treated as basis 

in the Roth IRA. As a result, a 

subsequent distribution from the Roth 

IRA in the amount of the rollover would 

be treated as a tax-free return of basis 

regardless of whether the individual had 

maintained a Roth IRA for 5 years 

(although the investment return on that 

amount earned in the Roth IRA would 

not be excluded from income when 

distributed unless the distribution 

satisfied the requirements for a qualified 

distribution from a Roth IRA). Similar to 

the case of a rollover to a designated 

Roth account, if the entire account 

balance of a designated Roth account is 

distributed and some or all of the 

distribution is rolled over to a Roth IRA, 

and, at the time of the distribution, the 

investment in the contract exceeds the 

balance in the designated Roth account, 

the investment in the contract in the 

distributing plan is included in the 

amount treated as a contribution to the 

Roth IRA. 

Certain Amounts Not Qualified 

Distributions 

Section 1.402(c)–2, A–4, provides a 

list of amounts that are not treated as 

eligible rollover distributions and are 

instead currently includible in income. 

These final regulations, like the 

proposed regulations, provide that these 

same amounts also cannot be qualified 

distributions. Distributions described in 

A–4(a) (distribution of elective deferrals 

in excess of the section 415 limits), (b) 

(corrective distribution of excess 

deferrals), and (c) (corrective 

distribution of excess contributions or 

excess aggregate contributions), have 

statutorily specified tax treatments. In 

the case of a deemed distribution under 

section 72(p) or the cost of current life 

insurance protection, an actual amount 

has not in fact been distributed. In the 

case of distributions of dividends 

deductible under section 404(k), section 

72(e)(5)(D) and § 1.404(k)–1T provide 

that these amounts are treated as paid 

under a separate contract providing only 

for payment of deductible dividends. 

However, if a dividend described in 

section 404(k) has been reinvested in 

accordance with section 

404(k)(2)(iii)(II), then a distribution of 

the reinvested amount can be a qualified 

distribution. 

In response to comments regarding 

hardship distributions, the final 

regulations clarify that an amount is not 

precluded from being a qualified 

distribution merely because it is 

described in section 402(c)(4) as an 

amount not eligible for rollover. Thus, 

hardship distributions and required 

minimum distributions are not 

precluded from being qualified 

distributions. Similarly, payments in a 

stream of periodic payments are not 

precluded from being qualified 

distributions merely because they are 

described in section 402(c)(4)(A). 

Distribution of Employer Securities and 

NUA 

The final regulations retain the rules 

of the proposed regulations relating to 

the distribution of employer securities 

and the application of the net 

unrealized appreciation election of 

section 402(e)(4). If a qualified 

distribution includes employer 

securities, the distribution is not 

includible in gross income and the basis 

of each security in the hands of the 

distributee is the fair market value of the 

security on the date of the distribution. 

In such a case, the distributee will 

receive capital gains treatment at the 

time of any future disposition of the 

security, to the extent of any postdistribution appreciation. If a 

distribution with respect to employer 

securities is not a qualified distribution, 

the rules of section 402(e)(4) apply in 

the same manner as to any other 

distribution except that the designated 

Roth account is treated as a separate 

contract. 

Some commentators inquired how 

these rules apply to the portion of a 

nonqualified distribution that exceeds 

the basis of the employer stock at the 

time of the distribution to the extent not 

includible in gross income as a return of 

the employee’s designated Roth 

contributions. As explained in Rev. Rul. 

74–398, 1974–2 C.B. 136, the basis of 

the stock at the time of the disposition 

will be increased to reflect such amount, 

so that such amount will not be 

subsequently taxed as appreciation at 

the time of a subsequent disposition of 

the stock. 

Annuity Contracts 

As noted above, in the Overview 

section of this preamble, these final 

regulations retain the rule from the 

proposed regulations that any 

transaction or accounting methodology 

involving an employee’s designated 

Roth account and any other accounts 

under the plan or plans of an employer 

that has the effect of directly or 

indirectly transferring value from 

another account into the designated 

Roth account violates the separate 

accounting requirement under section 

402A. Commentators asked for 

additional guidance on how this 

requirement is satisfied for separate 

accounts maintained within a single 

annuity contract, in particular how to 

allocate charges for guarantees under 

the contract which apply to the total of 

all accounts under the contract. The IRS 

and Treasury Department believe that it 

may be difficult for a single contract to 

have combined guarantees that apply to 

both accounts without the potential for 

a prohibited transfer of value between 

the accounts, and have not issued 

guidance on how to account for these 

guarantees (including related charges). 

However, this issue will continue to be 

considered by the IRS and Treasury 

Department. Therefore, the regulations 

authorize the Commissioner to provide 

additional guidance with respect to 

separate accounting within an annuity 

contract. 


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In response to comments, these final 

regulations clarify that, as previously 

indicated in § 1.402(c)–2, A–10(a), a 

distribution of an annuity contract from 

a designated Roth account is not a 

distribution event for purposes of 

section 402 or 402A. Thus, in such case, 

only distributions from the annuity 

contract are treated as distributions for 

those purposes. The determination of 

whether a distribution is a qualified or 

nonqualified distribution is made at the 

time of the distribution from the 

contract. 

Reporting and Recordkeeping 

These final regulations retain the rule 

of the proposed regulations that the plan 

administrator or other responsible party 

with respect to a plan with a designated 

Roth account is responsible for keeping 

track of the 5-taxable-year period for 

each employee and the amount of 

designated Roth contributions made on 

behalf of such employee. In addition, 

the plan administrator or other 

responsible party of a plan directly 

rolling over a distribution is required to 

provide the plan administrator of the 

recipient plan (that is, the plan 

accepting the eligible rollover 

distribution) with a statement indicating 

either the first year of the 5-taxable-year 

period for the employee and the portion 

of such distribution attributable to basis 

or that the distribution is a qualified 

distribution. If the distribution is not a 

direct rollover to a designated Roth 

account under another eligible plan, the 

plan administrator or responsible party 

must provide to the employee, upon 

request, this same information, except 

the statement need not indicate the first 

year of the 5-taxable-year period. The 

statement is required to be provided 

within a reasonable period following the 

direct rollover (or employee request), 

but in no event later than 30 days 

following the direct rollover (or 

employee request), and the plan 

administrator or other responsible party 

for the recipient plan is permitted to 

rely on these statements. If this 

information is provided on a statement 

attached to the check issued to the 

employee, this requirement would be 

satisfied. 

As noted in the preamble, to the 

extent that a portion of a distribution is 

includible in income (determined 

without regard to the rollover), if any 

portion of that distribution is rolled over 

to a designated Roth account by the 

distributee rather than by direct 

rollover, the plan administrator of the 

recipient plan must notify the IRS of its 

acceptance of the rollover contribution. 

The final regulations clarify that this 

reporting is only required to the extent 

provided in Forms and Instructions. 

Such Instructions will specify the 

address to which the notification must 

be sent and will require the following 

information: (1) The employee’s name 

and social security number; (2) the 

amount rolled over; (3) the year in 

which the rollover contribution was 

made; and (4) such other information as 

the Commissioner may prescribe in 

order to determine that the amount 

rolled over is a valid rollover 

contribution. Thus, until relevant Forms 

and Instructions are released, no 

reporting is required. 

With respect to other reporting, 

generally, the same reporting 

requirements apply to plans with 

designated Roth accounts as apply to 

other plans. A contribution to and a 

distribution from a designated Roth 

account must be reported on Form W–

2 and Form 1099–R, ‘‘Distributions 

From Pensions, Annuities, Retirement 

or Profit-Sharing Plans, IRAs, Insurance 

Contracts, etc.,’’ respectively, in 

accordance with the instructions 

thereto. An employee has no reporting 

obligation with respect to designated 

Roth contributions under a section 

401(k) or 403(b) plan. However, an 

employee rolling over a distribution 

from a designated Roth account to a 

Roth IRA should keep track of the 

amount rolled over in accordance with 

the instructions to Form 8606, 

‘‘Nondeductible IRAs.’’

Designated Roth Contributions as 

Excess Deferrals 

Even though designated Roth 

contributions are not excluded from 

income when contributed, they are 

treated as elective deferrals for purposes 

of section 402(g). Thus, to the extent 

total elective deferrals for the year 

exceed the section 402(g) limit for the 

year, the excess amount can be 

distributed by April 15th of the year 

following the year of the excess without 

adverse tax consequences. However, if 

such excess deferrals are not distributed 

by April 15th of the year following the 

year of the excess, these final 

regulations, like the proposed 

regulations, provide that any 

distribution attributable to an excess 

deferral that is a designated Roth 

contribution is includible in gross 

income (with no exclusion from income 

for amounts attributable to basis under 

section 72) and is not eligible for 

rollover. These regulations provide that 

if there are any excess deferrals that are 

designated Roth contributions that are 

not corrected prior to April 15th of the 

year following the excess, the first 

amounts distributed from the designated 

Roth account are treated as distributions 

of excess deferrals and earnings until 

the full amount of those excess deferrals 

(and attributable earnings) are 

distributed. 

Gap Period Income 

In addition, these final regulations 

retain the rule in the proposed 

regulations which reflected the statutory 

provisions which require that any 

distribution of excess deferrals include 

the applicable earnings from the plan. 

Unlike the existing final regulations 

under section 402(g), the earnings 

include income for the period after the 

taxable year (gap period income). The 

calculation of gap period income is 

comparable to the calculation of the gap 

period income for excess contributions 

and excess aggregate contributions 

under the 2004 final regulations under 

section 401(k) and 401(m). Thus, gap 

period income must be included in the 

distribution of excess deferrals to the 

extent the employee is or would be 

credited with allocable gain or loss on 

those excess deferrals for the gap period 

if the total account were to be 

distributed. This gap period income rule 

applies to both pre-tax excess deferrals 

and designated Roth contributions and 

continues to apply even after the 2008 

elimination of the rule for excess 

contributions and excess aggregate 

contributions under section 902(e)(3) of 

PPA ’06. 

Modifications to Final Roth 401(k) 

Regulations 

Some comments received in 

connection with the proposed 

regulations raised concerns not about 

those regulations but rather about the 

special rules for designated Roth 

contributions in § 1.401(k)–1(f) that 

were finalized in TD 9237, published on 

January 3, 2006 (71 FR 6). In response 

to those comments these final 

regulations make two changes to those 

special rules. First, these regulations 

clarify and expand the rule in 

§ 1.401(k)–1(f)(3)(ii) to provide that the 

balance of a participant’s designated 

Roth account and a participant’s other 

accounts under the plan are treated as 

accounts held under two separate plans 

(within the meaning of section 414(l)) 

for purposes of applying not only the 

special rule in A–11 of § 1.401(a)(31)–1 

for de minimis distributions (reasonably 

expected to total less than $200) but also 

both the automatic rollover rules for 

mandatory distributions under section 

401(a)(31)(B) and the rules in A–9 and 

A–10 of § 1.401(a)(31)–1 on the extent to 

which plans must allow split 

distributions. Thus, for example, if a 

participant has less than $1,000 in the 

participant’s designated Roth account 


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Federal Register / Vol. 72, No. 82 / Monday, April 30, 2007 / Rules and Regulations 21109 

and less than $1,000 in the participant’s 

other accounts, the plan will not need 

to provide the participant with an 

automatic rollover with respect to the 

designated Roth account or the other 

accounts even if the total accrued 

benefit of the participant under the plan 

exceeds $1,000. 

Second, in response to comments 

about compensation provided to certain 

foreign missionaries, the regulations are 

modified to require that an employer 

treat designated Roth contribution as 

not excludible from gross income as 

elective deferrals rather than treated as 

includible in gross income. As a result, 

if section 72(f)(2) applies to a 

contribution, an employee will have 

basis as a result of the contribution to 

the extent that contribution would have 

been excludible from gross income even 

if paid directly to the employee and 

such amount can be treated as a 

designated Roth contribution even 

though such amount is income that is 

not includible in taxable income. Thus, 

compensation for foreign missionaries is 

not precluded from being contributed to 

a designated Roth account merely 

because the compensation would not 

have been includible in gross income if 

paid directly. Finally, the regulations 

clarify that, for self-employed 

individuals, the requirement that a 

designated Roth contribution not be 

excludible from gross income as an 

elective deferral for being a designated 

Roth contribution is only satisfied if the 

self-employed individual does not claim 

a deduction for the contribution. 

Commentators inquired as to whether 

catch-up contributions may be 

designated Roth contributions. Catch-up 

contributions are treated the same as 

any other elective deferrals and, thus, a 

participant’s catch-up contributions 

may either be pre-tax elective deferrals 

or designated Roth contributions. 

Finally, these final regulations revise 

the special rules for designated Roth 

contributions in § 1.401(k)-1(f) to reflect 

the repeal in PPA ’06 of the sunset of 

the provisions relating to designated 

Roth contributions. 

Effective Date 

Section 402A applies to employees’

taxable years beginning on or after 

January 1, 2006. These final regulations 

under section 402A are generally 

applicable for taxable years beginning 

on or after January 1, 2007. However, 

certain provisions in these final 

regulations under section 402A are 

applicable at the same time as section 

402A. These include the clarification 

that the separate accounting 

requirement does not permit any 

transaction or accounting methodology 

that transfers value between designated 

Roth accounts and other accounts under 

a plan and the rules relating to rollovers 

to designated Roth accounts and Roth 

IRAs. Similarly, these final regulations 

under section 408A are applicable at the 

same time as section 402A. These final 

regulations also address the treatment of 

rollover contributions to Roth IRAs and 

designated Roth accounts. 

The final regulations under section 

402(g) relating to designated Roth 

contributions also are applicable at the 

same time as section 402A. Thus, these 

final regulations are applicable for 

excess deferrals for taxable years 

beginning on or after January 1, 2006. 

However, unlike the proposed 

regulations, the rule in these final 

regulations requiring distribution of gap 

period income on excess deferrals 

applies to excess deferrals for taxable 

years beginning on or after 2007, which 

are generally distributed on or after 

January 1, 2008. 

Special Analyses 

It has been determined that these final 

regulations are not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that 5 U.S.C. 

553(b) does not apply to these 

regulations. It is hereby certified that the 

collection of information in these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that 

most small entities that will maintain a 

designated Roth account already use a 

third party provider to administer the 

plan and the collection of information 

in these regulations, which is required 

to comply with the separate accounting 

and recordkeeping requirements of 

section 402A(b), will only minimally 

increase the third party provider’s 

administrative burden with respect to 

the plan. Therefore, an analysis under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. Pursuant to 

section 7805(f) of the Code, the 

proposed regulations preceding these 

final regulations were submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small business. 

Drafting Information 

The principal authors of these 

regulations are R. Lisa Mojiri-Azad, Bill 

Gibbs and Cathy Vohs, Office of 

Division Counsel/Associate Chief 

Counsel (Tax Exempt and Government 

Entities). However, other personnel 

from the IRS and Treasury Department 

participated in the development of these 

regulations. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding an entry 

in numerical order to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Section 1.402A–1 is also issued under 26 

U.S.C. 402A * * * 

■ Par. 2. Section 1.401(k)–0 is amended 

as follows: 

■ 1. The entries for 1.401(k)–1(f)(2), (3), 

(4) and (5) are revised. 

■ 2. The entry for 1.401(k)–1(f)(6) is 

added. 

§ 1.401(k)–0 Table of contents. 

* * * * * 

§ 1.401(k)–1 Certain cash or deferred 

arrangements. 

* * * * * 

(f) * * * 

(1) In general. 

(2) Inclusion treatment. 

(3) Separate accounting required. 

(4) Designated Roth contributions must 

satisfy rules applicable to elective 

contributions. 

(i) In general. 

(ii) Special rules for direct rollovers. 

(5) Rules regarding designated Roth 

contribution elections. 

(i) Frequency of elections. 

(ii) Default elections. 

(6) Effective date. 

■ Par. 3. Section 1.401(k)–1(f) is 

amended as follows: 

■ 1. Revise paragraph (f)(1)(ii) and (iii). 

■ 2. Redesignate paragraphs (f)(2) 

through (5) as (f)(3) through (6). 

■ 3. Add a new paragraph (f)(2). 

■ 4. Revise the first sentence of newly 

redesignated paragraph (f)(3) and add a 

sentence at the end. 

■ 5. Revise the last sentence of newly 

redesignated paragraph (f)(4)(ii). 

■ 6. Revise newly redesignated 

paragraph (f)(6). 

The addition and revision to 

§ 1.401(k)–1 read as follows: 

§ 1.401(k)–1 Certain cash or deferred 

arrangements. 

* * * * * 

(f) Special rules for designated Roth 

contributions. 

(1) * * * 


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21110 Federal Register / Vol. 72, No. 82 / Monday, April 30, 2007 / Rules and Regulations 

(ii) Treated by the employer as not 

excludible from the employee’s gross 

income (in accordance with paragraph 

(f)(2) of this section); 

(iii) Maintained by the plan in a 

separate account (in accordance with 

paragraph (f)(3) of this section). 

(2) Inclusion treatment. An elective 

contribution is generally treated as not 

excludible from gross income if it is 

treated as includible in gross income by 

the employer (e.g., by treating the 

contribution as wages subject to 

applicable income tax withholding). 

However, in the case of a self-employed 

individual, an elective contribution is 

treated as not excludible from gross 

income only if the individual does not 

claim a deduction for such amount. If an 

elective contribution would not have 

been includible in gross income if the 

amount had been paid directly to the 

employee (rather than being subject to a 

cash or deferral election), the elective 

contribution is nevertheless permitted 

to be a designated Roth contribution, 

provided the employee is entitled to 

treat the amount as an investment in the 

contract pursuant to section 72(f)(2). 

(3) Separate accounting required. 

Under the separate accounting 

requirement of this paragraph (f)(3), 

contributions and withdrawals of 

designated Roth contributions must be 

credited and debited to a designated 

Roth account maintained for the 

employee and the plan must maintain a 

record of the employee’s investment in 

the contract (that is, designated Roth 

contributions that have not been 

distributed) with respect to the 

employee’s designated Roth account. 

* * * See A–13 of § 1.402A–1 for 

additional requirements for separate 

accounting. 

(4) * * * 

(ii) * * * Moreover, a participant’s 

designated Roth account and the 

participant’s other accounts under a 

plan are treated as accounts held under 

two separate plans (within the meaning 

of section 414(l)) for purposes of 

applying the automatic rollover rules for 

mandatory distributions under section 

401(a)(31)(B)(i)(I) and the special rules 

in A–9 through A–11 of § 1.401(a)(31)–

1. 

* * * * * 

(6) Effective date. Section 402A and 

the provisions of this section 1.401(k)–

1(f) apply to taxable years beginning 

after December 31, 2005. 

* * * * * 

■ Par. 4. Section 1.402(g)–1 is amended 

as follows: 

■ 1. Revise the second sentence and add 

a third sentence to paragraph (a). 

■ 2. Add new paragraphs (b)(5) and 

(b)(6). 

■ 3. Revise paragraph (d). 

■ 4. Revise paragraph (e)(2) introductory 

text. 

■ 5. Revise paragraph (e)(2)(i). 

■ 6. Revise the second sentence and add 

a new third sentence in paragraph 

(e)(3)(i)(A). 

■ 7. Revise paragraph (e)(5)(i). 

■ 8. Add a sentence after the last 

sentence in paragraph (e)(5)(ii). 

■ 9. Revise paragraph (e)(5)(iii). 

■ 10. Add paragraph (e)(5)(v). 

■ 11. Add paragraph (e)(8)(iv). 

The additions and revisions to 

§ 1.402(g)–1 read as follows: 

§ 1.402(g)–1 Limitation on exclusion for 

elective deferrals. 

(a) In general. * * * Thus, an 

individual’s elective deferrals in excess 

of the applicable limit for a taxable year 

(that is, the individual’s excess deferrals 

for the year) must be included in gross 

income for the year, except to the extent 

the excess deferrals are comprised of 

designated Roth contributions, and thus, 

are already includible in gross income. 

A designated Roth contribution is 

treated as an excess deferral only to the 

extent that the total amount of 

designated Roth contributions for an 

individual exceeds the applicable limit 

for the taxable year or the designated 

Roth contributions are identified as 

excess deferrals and the individual 

receives a distribution of the excess 

deferrals and allocable income under 

paragraph (e)(2) or (e)(3) of this section. 

(b) * * * 

(5) Any designated Roth contributions 

described in section 402A (before 

applying the limits of section 402(g) or 

this section). 

(6) Any elective employer 

contributions to a SIMPLE retirement 

account, on behalf of an employee 

pursuant to a qualified salary reduction 

arrangement as described in section 

408(p)(2) (before applying the limits of 

section 402(g) or this section). 

* * * * * 

(d) Applicable limit—(1) In general. 

Except as provided under paragraph 

(d)(2) of this section, the applicable 

limit for an individual’s taxable year is 

the applicable dollar amount set forth in 

section 402(g)(1)(B). This applicable 

dollar amount is increased for the 

taxable year beginning in 2007 and later 

years in the same manner as the dollar 

amount under section 415(b)(1)(A) is 

adjusted pursuant to section 415(d). See 

§ 1.402(g)–2 for the treatment of catchup contributions described in section 

414(v). 

(2) Special adjustment for elective 

deferrals with respect to section 403(b) 

annuity contracts for certain long-term 

employees. The applicable limit for an 

individual who is a qualified employee 

(as defined in section 402(g)(7)(C)) and 

has elective deferrals described in 

paragraph (b)(3) or (5) of this section for 

a taxable year is adjusted by increasing 

the applicable limit otherwise 

determined under paragraph (d)(1) of 

this section in accordance with section 

402(g)(7). 

(e) * * * 

(2) Correction of excess deferrals after 

the taxable year. A plan may provide 

that if any amount is an excess deferral 

under paragraph (a) of this section: 

(i) Not later than the first April 15 (or 

such earlier date specified in the plan) 

following the close of the individual’s 

taxable year, the individual may notify 

each plan under which elective 

deferrals were made of the amount of 

the excess deferrals received by the 

plan. If any designated Roth 

contributions were made to a plan, the 

notification must also identify the 

extent, if any, to which the excess 

deferrals are comprised of designated 

Roth contributions. A plan may provide 

that an individual is deemed to have 

notified the plan of excess deferrals 

(including the portion of excess 

deferrals that are comprised of 

designated Roth contributions) to the 

extent the individual has excess 

deferrals for the taxable year calculated 

by taking into account only elective 

deferrals under the plan and other plans 

of the same employer and the plan may 

provide the extent to which such excess 

deferrals are comprised of designated 

Roth contributions. A plan may instead 

provide that the employer may notify 

the plan on behalf of the individual 

under these circumstances. 

* * * * * 

(3) * * * 

(i) * * * 

(A) * * * If any designated Roth 

contributions were made to a plan, the 

notification must identify the extent to 

which, if any, the excess deferrals are 

comprised of designated Roth 

contributions. A plan may provide that 

an individual is deemed to have notified 

the plan of excess deferrals (including 

the portion of excess deferrals that are 

comprised of designated Roth 

contributions) for the taxable year 

calculated by taking into account only 

elective deferrals under the plan and 

other plans of the same employer and 

the plan may provide the extent to 

which such excess deferrals are 

comprised of designated Roth 

contributions. * * * 

* * * * * 


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Federal Register / Vol. 72, No. 82 / Monday, April 30, 2007 / Rules and Regulations 21111 

(5) Income allocable to excess 

deferrals—(i) General rule. The income 

allocable to excess deferrals for a taxable 

year that begins on or after January 1, 

2007 is equal to the sum of the allocable 

gain or loss for the taxable year of the 

individual and, to the extent the excess 

deferrals are or will be credited with 

gain or loss for the period after the close 

of the taxable year and prior to the 

distribution (the gap period) if the total 

account were to be distributed, the 

allocable gain or loss during that period. 

The income allocable to excess deferrals 

for a taxable year that begins before 

2007 is determined using the 1.402(g)–

1(e)(5) (as it appeared in the April 1, 

2006 edition of 26 CFR Part 1). 

(ii) Method of allocating income. 

* * * A plan will not fail to use a 

reasonable method for computing the 

income allocable to excess deferrals 

merely because the income allocable to 

excess deferrals is determined on a date 

that is no more than 7 days before the 

distribution. 

(iii) Alternative method of allocating 

taxable year income. A plan may 

determine the income allocable to 

excess deferrals for the taxable year by 

multiplying the income for the taxable 

year allocable to elective deferrals by a 

fraction. The numerator of the fraction 

is the excess deferrals by the employee 

for the taxable year. The denominator of 

the fraction is equal to the sum of: 

(A) The total account balance of the 

employee attributable to elective 

deferrals as of the beginning of the 

taxable year, plus 

(B) The employee’s elective deferrals 

for the taxable year. 

* * * * * 

(v) Alternative method for allocating 

taxable year and gap period income. A 

plan may determine the allocable gain 

or loss for the aggregate of the taxable 

year and the gap period by applying the 

alternative method provided by 

paragraph (e)(5)(iii) of this section to 

this aggregate period. This is 

accomplished by substituting the 

income for the taxable year and the gap 

period for the income for the taxable 

year and by substituting the elective 

deferrals for the taxable year and the gap 

period for the elective deferrals for the 

taxable year in determining the fraction 

that is multiplied by that income. 

* * * * * 

(8) * * * 

(iv) Distributions of excess deferrals 

from a designated Roth account. The 

rules of paragraph (e)(8)(iii) of this 

section generally apply to distributions 

of excess deferrals that are designated 

Roth contributions and the attributable 

income. Thus, if a designated Roth 

account described in section 402A 

includes any excess deferrals, any 

distribution of amounts attributable to 

those excess deferrals are includible in 

gross income (without adjustment for 

any return of investment in the contract 

under section 72(e)(8)). In addition, 

such distributions cannot be qualified 

distributions described in section 

402A(d)(2) and are not eligible rollover 

distributions within the meaning of 

section 402(c)(4). For this purpose, if a 

designated Roth account includes any 

excess deferrals, any distributions from 

the account are treated as attributable to 

those excess deferrals until the total 

amount distributed from the designated 

Roth account equals the total of such 

deferrals and attributable income. 

* * * * * 

■ Par. 5. Sections 1.402A–1 and 

1.402A–2 are added to read as follows: 

§ 1.402A–1 Designated Roth Accounts. 

Q–1. What is a designated Roth 

account? 

A–1. A designated Roth account is a 

separate account under a qualified cash 

or deferred arrangement under a section 

401(a) plan, or under a section 403(b) 

plan, to which designated Roth 

contributions are permitted to be made 

in lieu of elective contributions, that 

satisfies the requirements of § 1.401(k)–

1(f) (in the case of a section 401(a) plan). 

Q–2. How is a distribution from a 

designated Roth account taxed? 

A–2. (a) The taxation of a distribution 

from a designated Roth account depends 

on whether or not the distribution is a 

qualified distribution. A qualified 

distribution from a designated Roth 

account is not includible in the 

distributee’s gross income. 

(b) Except as otherwise provided in 

paragraph (c) of this A–2, a qualified 

distribution is a distribution that is 

both—

(1) Made after the 5-taxable-year 

period of participation defined in A–4 

of this section has been completed; and 

(2) Made on or after the date the 

employee attains age 591⁄2, made to a 

beneficiary or the estate of the employee 

on or after the employee’s death, or 

attributable to the employee’s being 

disabled within the meaning of section 

72(m)(7). 

(c) A distribution from a designated 

Roth account is not a qualified 

distribution to the extent it consists of 

a distribution of excess deferrals and 

attributable income described in 

§ 1.402(g)–1(e). See A–11 of this section 

for other amounts that are not treated as 

qualified distributions, including excess 

contributions described in section 

401(k)(8), and excess aggregate 

contributions described in section 

401(m)(8), and income, on any of these 

excess amounts. 

Q–3. How is a distribution from a 

designated Roth account taxed if it is 

not a qualified distribution? 

A–3. Except as provided in A–11 of 

this section, a distribution from a 

designated Roth account that is not a 

qualified distribution is taxable to the 

distributee under section 402 in the case 

of a plan qualified under section 401(a) 

and under section 403(b)(1) in the case 

of a section 403(b) plan. For this 

purpose, a designated Roth account is 

treated as a separate contract under 

section 72. Thus, except as otherwise 

provided in A–5 of this section for a 

rollover, if a distribution is before the 

annuity starting date, the portion of any 

distribution that is includible in gross 

income as an amount allocable to 

income on the contract and the portion 

not includible in gross income as an 

amount allocable to investment in the 

contract is determined under section 

72(e)(8), treating the designated Roth 

account as a separate contract. 

Similarly, in the case of any amount 

received as an annuity, if a distribution 

is on or after the annuity starting date, 

the portion of any annuity payment that 

is includible in gross income as an 

amount allocable to income on the 

contract and the portion not includible 

in gross income as an amount allocable 

to investment in the contract is 

determined under section 72(b) or (d), 

as applicable, treating the designated 

Roth account as a separate contract. For 

purposes of section 72, designated Roth 

contributions are described in section 

72(f)(1) or 72(f)(2), to the extent 

applicable. 

Q–4. What is the 5-taxable-year period 

of participation described in A–2 of this 

section? 

A–4. (a) The 5-taxable-year period of 

participation described in A–2 of this 

section for a plan is the period of 5 

consecutive taxable years that begins 

with the first day of the first taxable year 

in which the employee makes a 

designated Roth contribution to any 

designated Roth account established for 

the employee under the same plan and 

ends when 5 consecutive taxable years 

have been completed. For this purpose, 

the first taxable year in which an 

employee makes a designated Roth 

contribution is the year in which the 

amount is includible in the employee’s 

gross income. Notwithstanding the 

preceding, however, a contribution that 

is returned as an excess deferral or 

excess contribution does not begin the 

5 taxable-year period of participation. 

Similarly, a contribution returned as a 

permissible withdrawal under section 


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414(w) does not begin the 5 taxable-year 

period of participation. 

(b) Generally, an employee’s 5- 

taxable-year period of participation is 

determined separately for each plan 

(within the meaning of section 414(l)) in 

which the employee participates. Thus, 

if an employee has elective deferrals 

made to designated Roth accounts under 

two or more plans, the employee may 

have two or more different 5-taxableyear periods of participation, depending 

on when the employee first had 

contributions made to a designated Roth 

account under each plan. However, if a 

direct rollover contribution of a 

distribution from a designated Roth 

account under another plan is made by 

the employee to the plan, the 5-taxableyear period of participation begins on 

the first day of the employee’s taxable 

year in which the employee first had 

designated Roth contributions made to 

such other designated Roth account, if 

earlier than the first taxable year in 

which a designated Roth contribution is 

made to the plan. See A–5(c) of this 

section for additional rules on 

determining the start of the 5-taxableyear of participation in the case of an 

indirect rollover. 

(c) The beginning of the 5-taxable-year 

period of participation is not 

redetermined for any portion of an 

employee’s designated Roth account. 

This is true even if the entire designated 

Roth account is distributed during the 5- 

taxable-year period of participation and 

the employee subsequently makes 

additional designated Roth 

contributions under the plan. 

(d) The rule in paragraph (c) of this 

section applies if the employee dies or 

the account is divided pursuant to a 

qualified domestic relations order 

(QDRO), and thus, a portion of the 

account is not payable to the employee 

and is payable to the employee’s 

beneficiary or an alternate payee. In the 

case of distribution to an alternate payee 

or beneficiary, generally, the age, death, 

or disability of the employee is used to 

determine whether the distribution to 

an alternate payee or beneficiary is 

qualified. However, if an alternate payee 

or a spousal beneficiary rolls the 

distribution into a designated Roth 

account in a plan maintained by his or 

her own employer, such individual’s 

age, disability, or death is used to 

determine whether a distribution from 

the recipient plan is qualified. In 

addition, if the rollover is a direct 

rollover contribution to the alternate 

payee’s or spousal beneficiary’s own 

designated Roth account, the 5-taxableyear period of participation under the 

recipient plan begins on the earlier of 

the date the employee’s 5-taxable-year 

period of participation began under the 

distributing plan or the date the 5- 

taxable-year period of participation 

applicable to the alternate payee’s or 

spousal beneficiary’s designated Roth 

account began under the recipient plan. 

(e) If a designated Roth contribution is 

made by a reemployed veteran for a year 

of qualified military service pursuant to 

section 414(u) that is before the year in 

which the contribution is actually made, 

the contribution is treated as having 

been made in the year of qualified 

military service to which the 

contribution relates, as designated by 

the reemployed veteran. Reemployed 

veterans may identify the year of 

qualified military service for which a 

contribution is made for other purposes, 

such as for entitlement to a match, and 

the treatment for the 5-taxable-year 

period of participation rule follows that 

identification. In the absence of such 

designation, for purposes of determining 

the first year of the five years of 

participation under section 

402A(d)(2)(B), the contribution is 

treated as relating to the first year of 

qualified military service for which the 

reemployed veteran could have made 

designated Roth contributions under the 

plan, or if later the first taxable year in 

which designated Roth contributions 

could be made under the plan. 

Q–5. How do the taxation rules apply 

to a distribution from a designated Roth 

account that is rolled over? 

A–5. (a) An eligible rollover 

distribution from a designated Roth 

account is permitted to be rolled over 

into another designated Roth account or 

a Roth IRA, and the amount rolled over 

is not currently includible in gross 

income. In accordance with section 

402(c)(2), to the extent that a portion of 

a distribution from a designated Roth 

account is not includible in income 

(determined without regard to the 

rollover), if that portion of the 

distribution is to be rolled over into a 

designated Roth account, the rollover 

must be accomplished through a direct 

rollover (i.e., a 60-day rollover to 

another designated Roth account is not 

available for this portion of the 

distribution). For this purpose, any 

amount paid in a direct rollover is 

treated as a separate distribution from 

any amount paid directly to the 

employee. If a distribution from a 

designated Roth account is instead 

made to the employee, the employee 

would still be able to roll over the entire 

amount (or any portion thereof) into a 

Roth IRA within the 60-day period 

described in section 402(c)(3). 

(b) In the case of an eligible rollover 

distribution from a designated Roth 

account that is not a qualified 

distribution and not paid as a direct 

rollover contribution, if less than the 

entire amount of the distribution is 

rolled over, the part that is rolled over 

is deemed to consist first of the portion 

of the distribution that is attributable to 

income under section 72(e)(8). 

(c) If an employee receives a 

distribution from a designated Roth 

account, the portion of the distribution 

that would be includible in gross 

income is permitted to be rolled over 

into a designated Roth account under 

another plan. In such a case, § 1.402A–

2, A–3, provides for additional reporting 

by the recipient plan. In addition, the 

employee’s period of participation 

under the distributing plan is not 

carried over to the recipient plan for 

purposes of satisfying the 5-taxable-year 

period of participation requirement 

under the recipient plan. Generally, the 

taxable year in which the recipient plan 

accepts such rollover contribution is the 

taxable year that begins the participant’s 

new 5-taxable-year period of 

participation. However, if the 

participant is rolling over to a plan in 

which the participant already has a preexisting designated Roth account with a 

longer period of participation, the 

starting date of the recipient account is 

used to measure the participant’s 5- 

taxable-year period of participation. 

(d) The following example illustrates 

the application of this A–5: 

Example. Employee B receives a $14,000 

eligible rollover distribution that is not a 

qualified distribution from B’s designated 

Roth account, consisting of $11,000 of 

investment in the contract and $3,000 of 

income. Within 60 days of receipt, Employee 

B rolls over $7,000 of the distribution into a 

Roth IRA. The $7,000 is deemed to consist 

of $3,000 of income and $4,000 of investment 

in the contract. Because the only portion of 

the distribution that could be includible in 

gross income (the income) is rolled over, 

none of the distribution is includible in 

Employee B’s gross income. 

(e) This A–5 applies for taxable years 

beginning on or after January 1, 2006. 

Q–6. In the case of a rollover 

contribution to a designated Roth 

account, how is the amount that is 

treated as investment in the contract 

under section 72 determined? 

A–6. (a) If a distribution from a 

designated Roth account is rolled over 

to another designated Roth account in a 

direct rollover, the amount of the 

rollover contribution allocated to 

investment in the contract in the 

recipient designated Roth account is the 

amount that would not have been 

includible in gross income (determined 

without regard to section 402(e)(4)) if 

the distribution had not been rolled 

over. Thus, if an amount that is a 


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qualified distribution is rolled over, the 

entire amount of the rollover 

contribution is allocated to investment 

in the contract. 

(b) If the entire account balance of a 

designated Roth account is rolled over 

to another designated Roth account in a 

direct rollover, and, at the time of the 

distribution, the investment in the 

contract exceeds the balance in the 

designated Roth account, the investment 

in the contract in the distributing plan 

is included in the investment in the 

contract of the recipient plan. 

Q–7. After a qualified distribution 

from a designated Roth account has 

been made, how is the remaining 

investment in the contract of the 

designated Roth account determined 

under section 72? 

A–7. (a) The portion of any qualified 

distribution that is treated as a recovery 

of investment in the contract is 

determined in the same manner as if the 

distribution were not a qualified 

distribution. (See A–3 of this section) 

Thus, the remaining investment in the 

contract in a designated Roth account 

after a qualified distribution is 

determined in the same manner after a 

qualified distribution as it would be 

determined if the distribution were not 

a qualified distribution. 

(b) The following example illustrates 

the application of this A–7: 

Example. Employee C receives a $12,000 

distribution, which is a qualified distribution 

that is attributable to the employee being 

disabled within the meaning of section 

72(m)(7), from C’s designated Roth account. 

Immediately prior to the distribution, the 

account consisted of $21,850 of investment 

in the contract (i.e., designated Roth 

contributions) and $1,150 of income. For 

purposes of determining recovery of 

investment in the contract under section 72, 

the distribution is deemed to consist of 

$11,400 of investment in the contract 

[$12,000 × 21,850/(1,150 + 21,850)], and $600 

of income [$12,000 × 1,150/(1,150 + 21,850)]. 

Immediately after the distribution, C’s 

designated Roth account consists of $10,450 

of investment in the contract and $550 of 

income. This determination of the remaining 

investment in the contract will be needed if 

C subsequently is no longer disabled and 

takes a nonqualified distribution from the 

designated Roth account. 

Q–8. What is the relationship between 

the accounting for designated Roth 

contributions as investment in the 

contract for purposes of section 72 and 

their treatment as elective deferrals 

available for a hardship distribution 

under section 401(k)(2)(B)? 

A–8. (a) There is no relationship 

between the accounting for designated 

Roth contributions as investment in the 

contract for purposes of section 72 and 

their treatment as elective deferrals 

available for a hardship distribution 

under section 401(k)(2)(B). A plan that 

makes a hardship distribution under 

section 401(k)(2)(B) from elective 

deferrals that includes designated Roth 

contributions must separately determine 

the amount of elective deferrals 

available for hardship and the amount 

of investment in the contract 

attributable to designated Roth 

contributions for purposes of section 72. 

Thus, the entire amount of a hardship 

distribution is treated as reducing the 

otherwise maximum distributable 

amount for purposes of applying the 

rule in section 401(k)(2)(B) and 

§ 1.401(k)–1(d)(3)(ii) that generally 

limits hardship distributions to the 

principal amount of elective deferrals 

made less the amount of elective 

deferrals previously distributed from the 

plan, even if a portion of the 

distribution is treated as income under 

section 72(e)(8). 

(b) The following example illustrates 

the application of this A–8: 

Example. The facts as in the Example in 

A–7 of this section, except that instead of 

being disabled, Employee C is receiving a 

hardship distribution. In addition, Employee 

C has made elective deferrals that are not 

designated Roth contributions totaling 

$20,000 and has received no previous 

distributions of elective deferrals from the 

plan. The adjustment to the investment in the 

contract is the same as in A–7 of this section, 

but for purposes of determining the amount 

of elective deferrals available for future 

hardship distribution, the entire amount of 

the distribution is subtracted from the 

maximum distributable amount. Thus, 

Employee C has only $29,850 

($41,850¥$12,000) available for hardship 

distribution from C’s designated Roth 

account. 

Q–9. Can an employee have more 

than one separate contract for 

designated Roth contributions under a 

plan qualified under section 401(a) or a 

section 403(b) plan? 

A–9. (a) Except as otherwise provided 

in paragraph (b) of this A–9, for 

purposes of section 72, there is only one 

separate contract for an employee with 

respect to the designated Roth 

contributions under a plan. Thus, if a 

plan maintains one separate account for 

designated Roth contributions made 

under the plan and another separate 

account for rollover contributions 

received from a designated Roth account 

under another plan (so that the rollover 

account is not required to be subject to 

the distribution restrictions otherwise 

applicable to the account consisting of 

designated Roth contributions made 

under the plan), both separate accounts 

are considered to be one contract for 

purposes of applying section 72 to the 

distributions from either account. 

(b) If a separate account with respect 

to an employee’s accrued benefit 

consisting of designated Roth 

contributions is established and 

maintained for an alternate payee 

pursuant to a qualified domestic 

relations order and another designated 

Roth account is maintained for the 

employee, each account is treated as a 

separate contract for purposes of section 

72. The alternate payee’s designated 

Roth account is also a separate contract 

for purposes of section 72 with respect 

to any other account maintained for that 

alternate payee. Similarly, if separate 

accounts are established and maintained 

for different beneficiaries after the death 

of an employee, the separate account for 

each beneficiary is treated as a separate 

contract under section 72 and is also a 

separate contract with respect to any 

other account maintained for that 

beneficiary under the plan that is not a 

designated Roth account. When the 

separate account is established for an 

alternate payee or for a beneficiary (after 

an employee’s death), each separate 

account must receive a proportionate 

amount attributable to investment in the 

contract. 

Q–10. What is the tax treatment of 

employer securities distributed from a 

designated Roth account? 

A–10. (a) If a distribution of employer 

securities from a designated Roth 

account is not a qualified distribution, 

section 402(e)(4)(B) applies. Thus, in the 

case of a lump-sum distribution that 

includes employer securities, unless the 

taxpayer elects otherwise, net 

unrealized appreciation attributable to 

the employer securities is not includible 

in gross income; and such net 

unrealized appreciation is not included 

in the basis of the distributed securities 

and is capital gain to the extent such 

appreciation is realized in a subsequent 

taxable transaction. 

(b) In the case of a qualified 

distribution of employer securities from 

a designated Roth account, the 

distributee’s basis in the distributed 

securities for purposes of subsequent 

disposition is their fair market value at 

the time of distribution. 

Q–11. Can an amount described in A–

4 of § 1.402(c)–2 with respect to a 

designated Roth account be a qualified 

distribution? 

A–11. No. An amount described in A–

4 of § 1.402(c)–2 with respect to a 

designated Roth account cannot be a 

qualified distribution. Such an amount 

is taxable under the rules of §§ 1.72–

16(b), 1.72(p)–1, A–11 through A–13, 

1.402(g)–1(e)(8), 1.401(k)–2(b)(2)(vi), 

1.401(m)–2(b)(2)(vi), or 1.404(k)–1T. 

Thus, for example, loans that are treated 

as deemed distributions pursuant to 


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section 72(p), or dividends paid on 

employer securities as described in 

section 404(k) are not qualified 

distributions even if the deemed 

distributions occur or the dividends are 

paid after the employee attains age 591⁄2

and the 5-taxable-year period of 

participation defined in A–4 of this 

section has been satisfied. However, if a 

dividend is reinvested in accordance 

with section 404(k)(2)(A)(iii)(II), the 

amount of such a dividend is not 

precluded from being a qualified 

distribution if later distributed. Further, 

an amount is not precluded from being 

a qualified distribution merely because 

it is described in section 402(c)(4) as an 

amount not eligible for rollover. Thus, a 

hardship distribution is not precluded 

from being a qualified distribution. 

Q–12. If any amount from a 

designated Roth account is included in 

a loan to an employee, do the plan 

aggregation rules of section 72(p)(2)(D) 

apply for purposes of determining the 

total amount an employee is permitted 

to borrow from the plan, even though 

the designated Roth account generally is 

treated as a separate contract under 

section 72? 

A–12. Yes. If any amount from a 

designated Roth account is included in 

a loan to an employee, notwithstanding 

the general rule that the designated Roth 

account is treated as a separate contract 

under section 72, the plan aggregation 

rules of section 72(p)(2)(D) apply for 

purposes of determining the maximum 

amount the employee is permitted to 

borrow from the plan and such amount 

is based on the total of the designated 

Roth contribution amounts and the 

other amounts under the plan. To the 

extent a loan is from a designated Roth 

account, the repayment requirement of 

section 72(p)(2)(C) must be satisfied 

separately with respect to that portion of 

the loan and with respect to the portion 

of the loan from other accounts under 

the plan. 

Q–13. Does a transaction or 

accounting methodology involving an 

employee’s designated Roth account 

and any other accounts under the plan 

or plans of an employer that has the 

effect of transferring value from the 

other accounts into the designated Roth 

account violate the separate accounting 

requirement of section 402A? 

A–13. (a) Yes. Any transaction or 

accounting methodology involving an 

employee’s designated Roth account 

and any other accounts under the plan 

or plans of an employer that has the 

effect of directly or indirectly 

transferring value from another account 

into the designated Roth account 

violates the separate accounting 

requirement under section 402A. 

However, any transaction that merely 

exchanges investments between 

accounts at fair market value will not 

violate the separate accounting 

requirement. 

(b) In the case of an annuity contract 

which contains both a designated Roth 

account and any other accounts, the 

Commissioner may prescribe additional 

guidance of general applicability, 

published in the Internal Revenue 

Bulletin (see 601.601(d)(2) of this 

chapter), to provide additional rules for 

allocation of income, expenses, gains 

and losses among the accounts under 

the contract. 

(c) This A–13 applies to designated 

Roth accounts for taxable years 

beginning on or after January 1, 2006. 

Q–14. How is an annuity contract that 

is distributed from a designated Roth 

account treated for purposes of section 

402A? 

A–14. A qualified plan distributed 

annuity contract within the meaning of 

§ 1.402(c)–2, A–10(a) that is distributed 

from a designated Roth account is not 

treated as a distribution for purposes of 

section 402 or 402A. Instead, the 

amounts paid under the annuity 

contract are treated as distributions for 

purposes of sections 402 and 402A. 

Thus, the period after the annuity 

contract is distributed and before a 

payment from the annuity contract is 

made is included in determining 

whether the five-year period of 

participation is satisfied. Further, for 

purposes of determining if a distribution 

is a qualified distribution, the 

determination of whether a distribution 

is made on or after the date the 

employee attains age 591⁄2, made to a 

beneficiary or the estate of the employee 

on or after the employee’s death, or 

attributable to the employee’s being 

disabled within the meaning of section 

72(m)(7) is made based on the facts at 

the time the distribution is made from 

the annuity contract. Thus for example, 

if an employee first makes a designated 

Roth contribution to a designated Roth 

account in 2006 at age 56, receives a 

distributed annuity contract within the 

meaning of § 1.402(c)–2, A–10(a) in 

2007 purchased only with assets from 

the designated Roth account, and then 

receives a distribution from the contract 

in 2011 at age 60, the distribution is a 

qualified distribution. 

Q–15. When are section 402A and this 

§ 1.402A–1 applicable? 

A–15. Section 402A is applicable for 

taxable years beginning on or after 

January 1, 2006. Except as otherwise 

provided in A–5 and A–13 of this 

section, the rules of this § 1.402A–1 

apply for taxable years beginning on or 

after January 1, 2007. 

§ 1.402A–2 Reporting and recordkeeping 

requirements with respect to designated 

Roth accounts. 

Q–1. Who is responsible for keeping 

track of the 5-taxable-year period of 

participation and the investment in the 

contract, i.e., the amount of unrecovered 

designated Roth contributions for the 

employee? 

A–1. The plan administrator or other 

responsible party with respect to a plan 

with a designated Roth account is 

responsible for keeping track of the 5- 

taxable-year period of participation for 

each employee and the amount of 

investment in the contract (unrecovered 

designated Roth contributions) on 

behalf of such employee. For purposes 

of the preceding sentence, in the 

absence of actual knowledge to the 

contrary, the plan administrator or other 

responsible party is permitted to assume 

that an employee’s taxable year is the 

calendar year. In the case of a direct 

rollover from another designated Roth 

account, the plan administrator or other 

responsible party of the recipient plan 

can rely on reasonable representations 

made by the plan administrator or 

responsible party with respect to the 

plan with the other designated Roth 

account. See A–2 of this section for 

statements required in the case of 

rollovers. 

Q–2. In the case of an eligible rollover 

distribution from a designated Roth 

account, what additional information 

must be provided with respect to such 

distribution? 

A–2. (a) Pursuant to section 6047(f), if 

an amount is distributed from a 

designated Roth account, the plan 

administrator or other responsible party 

with respect to the plan must provide a 

statement as described below in the 

following situations—

(1) In the case of a direct rollover of 

a distribution from a designated Roth 

account under a plan to a designated 

Roth account under another plan, the 

plan administrator or other responsible 

party must provide to the plan 

administrator or responsible party of the 

recipient plan either a statement 

indicating the first year of the 5-taxableyear period described in A–1 of this 

section and the portion of the 

distribution that is attributable to 

investment in the contract under section 

72, or a statement that the distribution 

is a qualified distribution. 

(2) If the distribution is not a direct 

rollover to a designated Roth account 

under another plan, the plan 

administrator or responsible party must 

provide to the employee, upon request, 

the same information described in 

paragraph (a)(1) of this A–2, except the 

statement need not indicate the first 


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Federal Register / Vol. 72, No. 82 / Monday, April 30, 2007 / Rules and Regulations 21115 

year of the 5-taxable-year period 

described in A–1 of the section. 

(b) The statement described in 

paragraph (a) of this A–2 must be 

provided within a reasonable period 

following the direct rollover or 

distributee request but in no event later 

than 30 days following the direct 

rollover or distributee request. 

Q–3. If a plan qualified under section 

401(a) or a section 403(b) plan accepts 

a 60-day rollover of earnings from a 

designated Roth account, what report to 

the IRS must be provided with respect 

to such rollover contribution? 

A–3. To the extent required in Forms 

and Instructions, if a plan qualified 

under section 401(a), or a section 403(b) 

plan, accepts a rollover contribution 

(other than a direct rollover 

contribution) under section 402(c)(2), or 

section 403(b)(8)(B), of the portion of a 

distribution from a designated Roth 

account that would have been 

includable in gross income, the plan 

administrator or other responsible party 

for the recipient plan must notify the 

Commissioner of its acceptance of the 

rollover contribution no later than the 

due date for filing Form 1099–R, ‘‘

Distributions From Pensions, Annuities, 

Retirement or Profit-Sharing Plans, 

IRAs, Insurance Contracts, etc.,.’’ The 

Forms and Instructions will specify the 

address to which the notification is 

required to be sent and will require 

inclusion of the employee’s name and 

social security number, the amount 

rolled over, the year in which the 

rollover contribution was made, and 

such other information as the 

Commissioner may prescribe in order to 

determine that the amount rolled over is 

a valid rollover contribution. 

Q–4. When is this § 1.402A–2 

applicable? 

A–4. The rules of this § 1.402A–2 are 

applicable for taxable years beginning 

on or after January 1, 2007. 

■ Par. 6. Section 1.408A–10 is added to 

read as follows: 

§ 1.408A–10 Coordination between 

designated Roth accounts and Roth IRAs. 

Q–1. Can an eligible rollover 

distribution, within the meaning of 

section 402(c)(4), from a designated 

Roth account, as defined in A–1 of 

§ 1.402A–1, be rolled over to a Roth 

IRA? 

A–1. Yes. An eligible rollover 

distribution, within the meaning of 

section 402(c)(4), from a designated 

Roth account may be rolled over to a 

Roth IRA. For purposes of this section, 

a designated Roth account means a 

designated Roth account as defined in 

A–1 of § 1.402A–1. 

Q–2. Can an eligible rollover 

distribution from a designated Roth 

account be rolled over to a Roth IRA 

even if the distributee is not otherwise 

eligible to make regular or conversion 

contributions to a Roth IRA? 

A–2. Yes. An individual may 

establish a Roth IRA and roll over an 

eligible rollover distribution from a 

designated Roth account to that Roth 

IRA even if such individual is not 

eligible to make regular contributions or 

conversion contributions (as described 

in section 408A(c)(2) and (d)(3), 

respectively) because of the modified 

adjusted gross income limits in section 

408A(b)(3). 

Q–3. For purposes of the ordering 

rules on distributions from Roth IRAs, 

what portion of a distribution from a 

rollover contribution from a designated 

Roth account is treated as contributions? 

A–3. (a) Under section 408A(d)(4), 

distributions from Roth IRAs are 

deemed to consist first of regular 

contributions, then of conversion 

contributions, and finally, of earnings. 

For purposes of section 408A(d)(4), the 

amount of a rollover contribution that is 

treated as a regular contribution is the 

portion of the distribution that is treated 

as investment in the contract under A–

6 of § 1.402A–1, and the remainder of 

the rollover contribution is treated as 

earnings. Thus, the entire amount of any 

qualified distribution from a designated 

Roth account that is rolled over into a 

Roth IRA is treated as a regular 

contribution to the Roth IRA. 

Accordingly, a subsequent distribution 

from the Roth IRA in the amount of that 

rollover contribution is not includible in 

gross income under the rules of A–8 of 

§ 1.408A–6. 

(b) If the entire account balance of a 

designated Roth account is distributed 

to an employee and only a portion of the 

distribution is rolled over to a Roth IRA 

within the 60-day period described in 

section 402(c)(3), and at the time of the 

distribution, the investment in the 

contract exceeds the balance in the 

designated Roth account, the portion of 

investment in the contract that exceeds 

the amount used to determine the 

taxable amount of the distribution is 

treated as a regular contribution for 

purposes of section 408A(d)(4). 

Q–4. In the case of a rollover from a 

designated Roth account to a Roth IRA, 

when does the 5-taxable-year period 

(described in section 408A(d)(2)(B) and 

A–1 of § 1.408A–6) for determining 

qualified distributions from a Roth IRA 

begin? 

A–4. (a) The 5-taxable-year period for 

determining a qualified distribution 

from a Roth IRA (described in section 

408A(d)(2)(B) and A–1 of § 1.408A–6) 

begins with the earlier of the taxable 

year described in A–2 of § 1.408A–6 or 

the taxable year in which a rollover 

contribution from a designated Roth 

account is made to a Roth IRA. The 5- 

taxable-year period described in this A–

4 and the 5-taxable-year period of 

participation described in A–4 of 

§ 1.402A–1 are determined 

independently. 

(b) The following examples illustrate 

the application of this A–4: 

Example 1. Employee D began making 

designated Roth contributions under his 

employer’s 401(k) plan in 2006. Employee D, 

who is over age 591⁄2, takes a distribution 

from D’s designated Roth account in 2008, 

prior to the end of the 5-taxable-year period 

of participation used to determine qualified 

distributions from a designated Roth account. 

The distribution is an eligible rollover 

distribution and D rolls it over in accordance 

with sections 402(c) and 402A(c)(3) to D’s 

Roth IRA, which was established in 2003. 

Any subsequent distribution from the Roth 

IRA of the amount rolled in, plus earnings 

thereon, would not be includible in gross 

income (because it would be a qualified 

distribution within the meaning of section 

408A(d)(2)). 

Example 2. The facts are the same as in 

Example 1, except that the Roth IRA is D’s 

first Roth IRA and is established with the 

rollover in 2008, which is the only 

contribution made to the Roth IRA. If a 

distribution is made from the Roth IRA prior 

to the end of the 5-taxable-year period used 

to determine qualified distributions from a 

Roth IRA (which begins in 2008, the year of 

the rollover which established the Roth IRA) 

the distribution would not be a qualified 

distribution within the meaning of section 

408A(d)(2), and any amount of the 

distribution that exceeded the portion of the 

rollover contribution that consisted of 

investment in the contract is includible in 

D’s gross income. 

Example 3. The facts are the same as in 

Example 2, except that the distribution from 

the designated Roth account and the rollover 

to the Roth IRA occur in 2011 (after the end 

of the 5-taxable-year period of participation 

used to determine qualified distributions 

from a designated Roth account). If a 

distribution is made from the Roth IRA prior 

to the expiration of the 5-taxable-year period 

used to determine qualified distributions 

from a Roth IRA, the distribution would not 

be a qualified distribution within the 

meaning of section 408A(d)(2), and any 

amount of the distribution that exceeded the 

amount rolled in is includible in D’s gross 

income. 

Q–5. Can amounts distributed from a 

Roth IRA be rolled over to a designated 

Roth account as defined in A–1 of 

§ 1.402A–1? 

A–5. No. Amounts distributed from a 

Roth IRA may be rolled over or 

transferred only to another Roth IRA 

and are not permitted to be rolled over 

to a designated Roth account under a 

section 401(a) or section 403(b) plan. 


pwalker on PROD1PC71 with RULES
21116 Federal Register / Vol. 72, No. 82 / Monday, April 30, 2007 / Rules and Regulations 

The same rule applies even if all the 

amounts in the Roth IRA are attributable 

to a rollover distribution from a 

designated Roth account in a plan. 

Q–6. When is this § 1.408A–10 

applicable? 

A–6. The rules of this § 1.408A–10 

apply for taxable years beginning on or 

after January 1, 2006. 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 7. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 8. In § 602.101, paragraph (b) is 

amended by adding an entry for 

1.402A–1 in numerical order to the table 

to read in part as follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

1.402A–1 .................................. 1545–1992 

* * * * * 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: April 23, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E7–8125 Filed 4–27–07; 8:45 am] 

BILLING CODE 4830–01–P 

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 52 

[EPA–R05–OAR–2007–0138; FRL–8302–5] 

Approval and Promulgation of 

Implementation Plans; Illinois 

AGENCY: Environmental Protection 

Agency (EPA). 

ACTION: Direct final rule. 

SUMMARY: The EPA is approving the 

incorporation of revised air pollution 

permitting and emission standards rules 

into the Illinois State Implementation 

Plan (SIP). The State submitted this 

request for revision to its SIP to EPA on 

May 31, 2006. This approval makes the 

State’s rules federally enforceable. 

DATES: This rule is effective on June 29, 

2007, unless EPA receives adverse 

comment by May 30, 2007. If adverse 

comments are received, EPA will 

publish a timely withdrawal of the 

direct final rule in the Federal Register 

informing the public that the rule will 

not take effect. 

ADDRESSES: Submit your comments, 

identified by Docket ID No. EPA–R05–

OAR–2007–0138, by one of the 

following methods: 

1. http://www.regulations.gov: Follow 

the on-line instructions for submitting 

comments. 

2. E-mail: blakley.pamela@epa.gov. 

3. Fax: (312) 886–5824. 

4. Mail: Pamela Blakley, Chief, Air 

Permits Section, Air Programs Branch 

(AR–18J), U.S. Environmental 

Protection Agency, 77 West Jackson 

Boulevard, Chicago, Illinois 60604. 

5. Hand Delivery: Pamela Blakley, 

Chief, Air Permits Section, Air Programs 

Branch (AR–18J), U.S. Environmental 

Protection Agency, 77 West Jackson 

Boulevard, Chicago, Illinois 60604. 

Such deliveries are only accepted 

during the Regional Office normal hours 

of operation, and special arrangements 

should be made for deliveries of boxed 

information. The Regional Office official 

hours of business are Monday through 

Friday, 8:30 a.m. to 4:30 p.m. excluding 

Federal holidays. 

Instructions: Direct your comments to 

Docket ID No. EPA–R05–OAR–2007–

0138. EPA’s policy is that all comments 

received will be included in the public 

docket without change and may be 

made available online at http:// 

www.regulations.gov, including any 

personal information provided, unless 

the comment includes information 

claimed to be Confidential Business 

Information (CBI) or other information 

whose disclosure is restricted by statute. 

Do not submit information that you 

consider to be CBI or otherwise 

protected through http:// 

www.regulations.gov or e-mail. The 

http://www.regulations.gov Web site is 

an ‘‘anonymous access’’ system, which 

means EPA will not know your identity 

or contact information unless you 

provide it in the body of your comment. 

If you send an e-mail comment directly 

to EPA without going through http:// 

www.regulations.gov your e-mail 

address will be automatically captured 

and included as part of the comment 

that is placed in the public docket and 

made available on the Internet. If you 

submit an electronic comment, EPA 

recommends that you include your 

name and other contact information in 

the body of your comment and with any 

disk or CD–ROM you submit. If EPA 

cannot read your comment due to 

technical difficulties and cannot contact 

you for clarification, EPA may not be 

able to consider your comment. 

Electronic files should avoid the use of 

special characters, any form of 

encryption, and be free of any defects or 

viruses. 

Docket: All documents in the docket 

are listed in the http:// 

www.regulations.gov index. Although 

listed in the index, some information is 

not publicly available, e.g., CBI or other 

information whose disclosure is 

restricted by statute. Certain other 

material, such as copyrighted material, 

will be publicly available only in hard 

copy. Publicly available docket 

materials are available either 

electronically in http:// 

www.regulations.gov or in hard copy at 

the U.S. Environmental Protection 

Agency, Region 5, Air and Radiation 

Division, 77 West Jackson Boulevard, 

Chicago, Illinois 60604. This Facility is 

open from 8:30 a.m. to 4:30 p.m., 

Monday through Friday, excluding legal 

holidays. We recommend that you 

telephone Constantine Blathras at (312) 

886–0671 before visiting the Region 5 

office. 

FOR FURTHER INFORMATION CONTACT: 

Constantine Blathras, Air and Radiation 

Division, Air Programs Branch, U.S. 

Environmental Protection Agency, 

Region 5, 77 W. Jackson Boulevard (AR–

18J), Chicago, Illinois 60604. 

SUPPLEMENTARY INFORMATION: 

Throughout this document, ‘‘we’’, ‘‘us’’, 

or ‘‘our’’ are used to mean EPA. This 

supplementary information section is 

arranged as follows: 

I. Questions and Answers 

A. What action is EPA taking? 

B. Why is EPA taking this action? 

C. How do these rule changes affect current 

Federal requirements? 

D. Why has the State made these regulatory 

changes? 

E. What types of emission units are 

affected by these changes? 

F. How will EPA’s approval of revised 

permit exemptions affect air quality? 

G. Does this SIP revision contain any other 

changes? 

II. Statutory and Executive Order Reviews 

I. Questions and Answers 

A. What action is EPA taking? 

We are approving two revisions to the 

Illinois SIP which the State of Illinois 

requested. Specifically, we are 

approving the incorporation of revisions 

to Title 35 of the Illinois Administrative 

Code (35 IAC) 201.146, Exemptions 

from State Permit Requirements into the 

Illinois SIP. These revisions clarify, 

modify, and add to the list of emission 

units and activities which are exempt 


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