On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 (“SBJA”, P.L. 111-240).  This law includes a couple of provisions, specific to employee benefit plans.  Following are highlights of this new law:

Roth Conversions

Of particular note, the SBJA permits Roth conversions inside a 401(k) plan, or a 403(b) plan.  The primary advantage of a Roth account is that the distribution and earnings thereon are tax-favored; though, the contribution is subject to tax.

Since 2006, both 401(k) plans and 403(b) plans have been permitted to include Roth accounts.  However, only new money could be contributed to the Roth account.  The way to transfer money from a qualified plan to a Roth account has been through a rollover distribution to a Roth IRA.  The SBJA allows the conversion to occur inside the plan, as long as certain conditions are met:

1. The plan must allow for Roth accounts;
2. The plan offering the Roth account must include traditional pre-tax elective deferrals; and
3. Amounts available for the conversion are those amounts available for distribution.  

For Roth conversion occurring in 2010, the tax liability can be paid equally in 2011 and 2012.  Alternatively, the individual could pay the entire tax liability in 2010.  The individual must pay the requisite taxes on the Roth conversion.  For years after 2010, the tax liability is due in the tax year of the conversion.

There will be employer reporting obligations for these Roth conversions, which will be hopefully explained in future guidance.  Presumably, the plan allowing a 2010 Roth conversion would have to be amended prior to the end of the year.

Beginning in 2011, 457 government plans will be permitted to adopt Roth accounts, and will be permitted to allow Roth conversions.

Small Business Tax Credit Expanded

The small business tax credit carry-back and carry-forward rules have been amended to allow a 5 year, rather than 1 year, carry-back, and 24-year, rather than 20-year, carry-forward.  This change may make the small employer health insurance tax credit more appealing.  This change takes effect for the 2010 tax year.  The law also allows the alternative minimum tax to be offset by available tax credit for the 2010 tax year.

Health Premium Deductions for Self-employed Individuals 

For the 2010 tax year only, this law allows a one-year tax deduction from the distributive share for self-employed individuals.  Historically, self-employed individuals have been able to take an income tax deduction for premiums they pay for health insurance for themselves and their family members.  This law will allow an additional deduction against their distributive share, as long as the individual is paying the premium him/herself.

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.