There is a shortage of definitive information surrounding Roth contributions. However, here are a few of the available highlights:

• Beginning January 1, 2006, 401(k) plan sponsors will have the option of offering participants the ability to contribute both pre-tax and Roth IRA-type after-tax dollars to their plan. The after-tax dollars will be treated like contributions to a Roth IRA: They will grow-tax deferred, and any earnings attributable to those contributions will not be subject to federal income tax.
• Roth contributions will count towards the annual deferral limit, which will be $15,000 in 2006 and indexed thereafter.
• Roth 401(k) contributions may create a powerful planning opportunity for tax and financial advisors: Participants who are offered both contribution options will likely be able to mix-and-match at will. For example, they could elect to designate 40% of their deferral as pre-tax and 60% as after-tax, or any variation thereof. Given that fact, many participants will need to carefully evaluate their individual tax situations, which may require the assistance of a qualified advisor.

Words of Caution

Before a plan sponsor elects to add Roth contributions to a plan, they need to take several things into consideration. First, adding Roth after-tax contributions will add some complexity to the payroll and deferral-transmittal processes. Payroll vendors and staff members involved in the payroll process will need to change their existing practices in order to track and submit a new form of deferral. Second, 401(k) plan recordkeepers will need to adjust their systems to track Roth contributions separately. Historically, these types of changes have taken some time to successfully implement. Distributions will also become more complex as participants may have two deferral sources from which to take a loan or distribution. And finally, the IRS will need to provide more guidance on what type of documentation modifications will be required in order to implement the Roth 401(k).