Foreign earned income elections do not block qualified Roth contributions

Plain-English summary

A qualified defined contribution plan covered U.S. citizens working abroad and allowed participants to designate elective deferrals as Roth contributions. The plan asked whether employees could make those Roth contributions from wages without regard to a later election to exclude foreign earned income under section 911. Section 415 regulations determine compensation without regard to the section 911 exclusion, while the employer treated each Roth contribution as included in income when made. The IRS ruled that the plan could permit the contributions if the Roth designation was irrevocable, prospective, and otherwise satisfied the qualified Roth program rules. The ruling did not decide whether the plan met all section 401(a) qualification requirements.

Ruling snapshot

• Question: May employees working abroad make qualified Roth contributions from wages even if they later elect the section 911 foreign earned income exclusion?
• Outcome: Approved
• Key authorities: IRC §§ 401(k), 402A, 415(c)(3), and 911; Treas. Reg. §§ 1.401(k)-1 and 1.415(c)-2

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202302007 Third Party Communication: None
Release Date: 1/13/2023 Date of Communication: Not Applicable
Index Number: 402A.00-00
Person To Contact:
------------------------------------------------ ---------------------, ID No. ----------
-------------------------- Telephone Number:
------------ --------------------
--------------------------- Refer Reply To:
------------------------------------- CC:EEE:EB:QP1
PLR-108457-22
Date:
October 11, 2022

Legend

Plan = ------------------------------------------

Employer = --------------------

Country A = --------

Dear -------------------------

This letter is in response to a request dated April 25, 2022, as supplemented by
correspondence dated August 10, 2022, August 14, 2022, August 22, 2022, September
14, 2022, and September 19, 2022, submitted on your behalf by your authorized
representative, regarding whether a Plan participant’s qualified Roth contributions
should be determined without regard to an election of the foreign earned income
exclusion under section 911 of the Internal Revenue Code (Code) with respect to the
participant’s wages from the Employer.

FACTS

The following facts and representations have been submitted under penalties of perjury
in support of the ruling requested:

The Employer sponsors the Plan, a defined contribution plan qualified under
section 401(a) with a qualified cash or deferred arrangement, which covers U.S. citizens
who are employees of the Employer in Country A and operates under a pre-approved
plan document.
PLR-108457-22 2

The Plan defines an Elective Deferral as an “Employee contribution made to the Plan as
a Pre-tax Elective Deferral or a Roth Elective Deferral pursuant to Article 4 of the Plan.”
It also defines a Roth Elective Deferral as an “Elective Deferral that is: (a) designated
irrevocably at the time of the cash or deferred election as a Roth Elective Deferral that is
being made in lieu of all or a portion of the Pre-Tax Elective Deferrals the Participant is
otherwise eligible to make under the Plan; and (b) treated by the Company as includible
in the Participant's income at the time the Participant would have received that amount
in cash if the Participant had not made a cash or deferred election.”

The Plan permits participants to elect to defer into the Plan a percentage of their
compensation paid to them by the Employer and provides, that elective deferrals may
only be made with respect to amounts that are compensation under section 415(c)(3).
The Plan also provides, that to the extent provided in the adoption agreement,
participants are eligible to irrevocably designate some, or all, of their elective deferrals
as either pre-tax elective deferrals or Roth elective deferrals. Since the Plan’s inception,
the Employer has elected under the Plan document to provide the opportunity to
participants to make elective deferrals under the Plan, or to choose to treat those
deferrals as Roth elective deferrals.

To the extent that participants elect to make Roth elective deferrals, the Employer treats
them as includible in gross income for all plan administration purposes at the time the
contribution is made. This includes the financial accounting of the Plan's and
participants' accounts; the enforcement of certain participant rights with regard to those
contributions; the taxation treatment of distributions from the Plan, including corrective
distributions as well as loans and their defaults; and other withdrawals.

RULING REQUESTED

The Plan requests the following ruling:

With respect to compensation that is paid by the Employer to its employees as
wages, is it permissible under the Code for the Plan to permit Plan participants to
make qualified Roth contributions into the Plan from their wages under a qualified
Roth contribution program, without regard to whether participants may subsequently
elect the foreign earned income exclusion under section 911 on all or part of their
wages payable to them by the Employer?

LAW AND ANALYSIS

Section 402A(a)(1) provides, as a general rule, that if an applicable retirement plan
includes a qualified Roth contribution program, any designated Roth contribution made
by an employee pursuant to the program is treated as an elective deferral for purposes
of Chapter 1 of the Code, except that the contribution is not excludable from gross
income.
PLR-108457-22 3

Under section 402A(b)(1), the term “qualified Roth contribution program” means a
program under which an employee may elect to make designated Roth contributions in
lieu of all or a portion of elective deferrals the employee is otherwise eligible to make
under the applicable retirement plan.

Under section 402A(c)(1), the term “designated Roth contribution” means any elective
deferral that is excludable from the employee’s gross income without regard to this
section and that the employee designates (at such time and in such manner as the
Secretary prescribes) as not being so excludable.

The regulations on qualified cash or deferred arrangements under section 401(k)
include guidance on designated Roth contributions under section 402A. Treas. Reg.
§ .401(k)-1(f)(1) provides, as a general rule:

   The term designated Roth contribution means an elective contribution under a
   qualified cash or deferred arrangement that, to the extent permitted under the
   plan, is--

          (i) Designated irrevocably by the employee at the time of the cash or
          deferred election as a designated Roth contribution that is being made in
          lieu of all or a portion of the pre-tax elective contributions the employee is
          otherwise eligible to make under the plan;

          (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).

Section 1.401(k)-1(f)(2) provides, in relevant part, that an elective contribution is
generally treated as not excludible from gross income if it is treated as includible in
gross income by the employer (for example, by treating the contribution as wages
subject to applicable income tax withholding).

Section 1.401(k)-1(f)(4)(i) provides that designated Roth contributions must satisfy the
other requirements that apply to elective contributions. Thus, the same definition of
“compensation” applies to both elective deferrals and to designated Roth contributions.
Section 1.401(k)-1(e)(8) provides that cash or deferred elections can only be made with
respect to amounts that are compensation within the meaning of section 415(c)(3) and
§ 1.415(c)-2. Section 415(c)(3) defines “participant’s compensation” as the participant’s
compensation from the employer for the year. Section 1.415(c)-2(b)(1) defines
compensation to mean remuneration for services including an employee's wages,
salaries, fees for professional services, and other amounts received for personal
services actually rendered in the course of employment with the employer maintaining
the plan, to the extent that the amounts are includible in gross income. In contrast,
§ 1.415(c)-2(c)(1) provides that contributions are not treated as compensation to the
PLR-108457-22 4

extent that the contributions are not includible in the gross income of the employee for
the taxable year in which contributed. However, under § 1.415(c)-2(g)(5)(i), the
determination of whether amounts are treated as compensation is made without regard
to the exclusion from gross income under section 911 (special income exclusion for
citizens or residents of the United States living abroad).

The designation of elective contributions as Roth contributions must satisfy the timing
requirement under § 1.401(k)-1(a)(3)(iii) and may only be made prospectively - that is,
with respect to an amount that is not currently available (within the meaning of
§ 1.401(k)-1(a)(3)(iv)) to the employee on the date of the election. Thus, a participant in
a section 401(k) plan with a qualified Roth contribution program may elect to make Roth
contributions for a taxable year only if the Roth designation is irrevocable, the election
precedes the date the contribution is made to the plan, and the employer treats the
contribution as includible in the participant’s gross income for the taxable year.

As represented by the Plan, the Employer treats the Roth contribution as includible in
gross income for all Plan administration purposes at the time the contribution is made,
including the financial accounting of the Plan's and participants' accounts. This
treatment is consistent with the requirement under § 1.401(k)-1(f) with respect to
designated Roth contributions that the Employer treat the elective contributions as
includible in the participant’s gross income.

CONCLUSION

Based on the foregoing facts and representations, we conclude that, with respect to
compensation that is paid by the Employer to its employees as wages, the Plan may
permit participants to make qualified Roth contributions into the Plan from their wages
under a qualified Roth contribution program, without regard to whether participants may
subsequently elect the foreign earned income exclusion under section 911 on all or part
of the wages payable to them by the Employer.

This letter expresses no opinion as to whether the Plan satisfies the requirements of
section 401(a).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.
PLR-108457-22 5

The ruling contained in this letter is based upon information and representations
submitted by the Plan and accompanied by a penalties of perjury statement executed
by an appropriate party, as specified in Rev. Proc. 2022-1, 2020-1 IRB 1, § 7.01(16)(b).
This office has not verified any of the material submitted in support of the request for a
ruling, and such material is subject to verification on examination. The Associate office
will revoke or modify a letter ruling and apply the revocation retroactively if there has
been a misstatement or omission of controlling facts; the facts at the time of the
transaction are materially different from the controlling facts on which the ruling was
based; or, in the case of a transaction involving a continuing action or series of actions,
the controlling facts change during the course of the transaction. See Rev. Proc. 2022-
1, § 11.05.
Sincerely,

                             Keith R. Kost
                             Senior Technician Reviewer, Qualified Plans Branch 2
                             Office of Associate Chief Counsel
                             (Employee Benefits, Exempt Organizations, and
                             Employment Taxes)

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