1. Roth 401(k) and Roth 403(b) Web Conference
Hosts: Dan Fontaine Michael Taricani Sandy Koeppel
Wednesday, June 28, 2006
3:00 to 4:30 Eastern
(800)
Prudential Retirement provides this information as a courtesy but not as a substitute for legal advice to any customer from its own legal counsel. Please discuss these matters with legal counsel to the extent you deem appropriate.

2. Agenda Overview History, Timeline of Roth 401(k) and Roth 403(b)
Provisions
Regulatory Open Issues
The Marketplace
Roth “Bloopers”
Trends
Design Considerations
Sponsor Preparedness
Washington Update
Q&A

3. Overview - History History of Roth 401(k)/403(b)
Established with EGTRRA 2001
Effective January 1, 2006
Proposed regulations published by IRS on March 2, 2005
Contributions
Accounting
Public comments through May 31, 2005
“Final” regulations issued December 30, 2005

4. Overview - History History of Roth 401(k)/403(b) Continued
New proposed regulations issued January 26, 2006
Distributions
Taxation
Reporting
Roth 403(b)
Public comments through April 26, 2006.
Sample amendment issued by IRS on April 24, 2006

5. Overview - Provisions Characteristics of Roth Contributions
Are elective deferral contributions, but are contributed on a post-tax basis
Requires a 401(k) or 403(b) plan; cannot have a “Roth-only” plan
Requires separate accounting
Employees can choose to contribute elective deferrals as:
Pre-tax only
Roth only
Any combination of pre-tax and Roth
Are not subject to income limits
Catch-up Roth contributions are allowed

6. Overview - Provisions
Characteristics of Roth Contribution Rules and Limits
In combination with pre-tax elective deferrals, are subject to the §402(g) annual deferral limit
Subject to MRD rules (unlike Roth IRAs)
Subject to 401(k) non-discrimination rules and limits:
Must be included in the ADP Test
Subject to the §415 Annual Additions Limit
Subject to the Top Heavy Rules

7. Overview - Provisions Characteristics of Roth Distributions
May only be distributed:
At severance from employment
Upon death
Upon disability
Upon plan termination
At age 59½
Upon hardship

8. Overview - Provisions More Characteristics of Roth Distributions
Fully tax-free when “qualified”:
Age 59½, death, disability; and
Roth account has been open for at least five years.
Some distributions can never be “qualified”— even if the age and five-year-holding requirements are met:
Corrective Distributions
Excess Deferrals
Excess Contributions (failed ADP Test)
Excess Annual Additions
Deemed Distributions of Defaulted Loans

9. Regulatory Open Issues
Rollover Complexity
Different rules for:
Direct vs indirect rollover
Rollover to qualified plan vs rollover to Roth IRA
Qualified vs non-qualified Roth distributions
Full vs partial rollovers
Automatic Rollover Rules
Cannot “carve out” Roth amounts between $200 and $999; may not find Roth IRA provider willing to take small balances

10. Regulatory Open Issues
Form 1099-R
Separate Roth Form 1099-R is “expected to be required”
IRS has not yet issued Roth distribution tax codes
402(f) “Rollover Distribution” Notice
No sample language from IRS despite rollover complexity
Application of Five-Year Holding Period
Direct rollover to qualified plan: Start date carries over
Indirect rollover to qualified plan: No carry over
Direct rollover to Roth IRA: No carry over
Indirect rollover to Roth IRA: No carry over

11. Regulatory Open Issues
Rollover Contribution Reporting Requirement
New requirement for Sponsors
Pertains to indirect Roth rollover contributions only
Seems unnecessary
Lack of Clarity for Hardship Withdrawals
Only contributions (not earnings) are eligible for withdrawal.
If non-qualified, a portion of the contributions withdrawn is treated like taxable earnings.
Full withdrawal amount reduces future hardship available.

12. Regulatory Open Issues
Loans, In-Service Withdrawals, and Hardships
Not clear if pre-tax and Roth must have identical treatment or if flexibility is allowed
Plans can provide participant choice between pre-tax and Roth elective deferrals for distributions
Also pertains to corrective distributions
Minimum Required Distributions
Required from qualified programs but why?!
Not required from Roth IRA

13. Marketplace Roth “Bloopers”
Prudential Retirement has helped clients avoid . . .
Design problems
Roth IRAs cannot be rolled to a qualified plan.
Don’t use imprecise plan language: Basis for match should be “elective deferrals” (not “pre-tax contributions”).
Can’t allow direct rollovers between Roth 401(k) and Roth 403(b) plans.
“Participant choice” is not always a good thing

14. Marketplace Roth “Bloopers”
Prudential Retirement has helped clients overcome . . .
Industry “guidance” that lacked expertise
Roth and pre-tax contributions cannot be combined in a single contribution source.
The Roth feature is not more advantageous if taxes in retirement will be lower than during working years.
Hardship withdrawals from Roth accounts are not completely non-taxable.
Roth rollovers to Roth IRA do not carry over the five-year start date.

15. Marketplace Trends for Roth Adoption
Profit Sharing/401(k) Council of America (PSCA) Plan Sponsor Survey – October 2005
17.4% plan to add the Roth feature (no specific time frame)
40.9% are still considering
35.1% will not add
6.6% have not thought about it
Prudential Retirement Mini-Survey of Current Clients May 2006
2.6% will add the Roth feature in 2006
27.2% will add the Roth feature in 2007 or later
70.2% will not add the Roth feature

16. Sponsor Preparedness ERISA Compliance
Act solely in the interest of (all) the participants and their beneficiaries
Board resolution, if applicable
Broad-based participant education
Payroll updates: Include Roth Contributions for
Tax withholding and W2 reporting
Match calculations
402(g) limit tracking and 401(k) ADP testing
Contribution data file programming

17. Sponsor Preparedness Administrative Processes
Enrollment and salary reduction change forms
Written administrative procedures and plan amendment
Roth IRA provider for forced rollovers

18. Set-Up Guidelines
Important design considerations in the absence of better Roth guidance from the IRS:
To match or not to match
Deferral elections
Automatic enrollment and deferral rate escalation programs
Rollover contributions
Catch-up contributions
In-service and hardship withdrawal hierarchies
Plan loans
Corrective distribution hierarchies
Automatic rollover distributions

19. Proposed Roth 401(k)/403(b) Regulations
Washington Update
Questions & Answers
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