Sorry, but I don't think that you aren't getting this at all.
I thought the main point to rollovers was to enable employees to be free of dependence on their employers ability to stay in business. If conversions can only be done after leaving the company, that seems to substantially defeat the purpose of it.
That's the way the law is written. The main point of rollovers is not the employer's viability. Funds in 401K's are in the care of a custodian. An employer bankruptcy may affect immediate access to 401K funds since usually, in bankruptcy, the plan is ended and that requires a thorough audit and clearance from the IRS. But the 401k funds do not go away.
The main point of a rollover, when you are eligible for one, is to avoid being stuck in a plan that you do not like. A rollover gives the freedom to choose how to invest the funds.
Payslips disclose the cost of 401k plans, which would document the cost basis.
Paystubs have nothing to do with it. If your contributions to the 401k are pre-tax (and most are, although there are circumstances in which after-tax contributions can be made), then there is no cost basis.
I know, it doesn't quite give the taxpayer the due relief, but it's something. It's more than the remedy for 401k losses. Although liquidating all Roth funds is a hindering limitation, it may still make sense to do so, in order to offset the loss against taxes. It's a better option than simply having to eat the full impact of a 401k loss.
Let me try an example:
1) You make pre-tax contributions to a 401k totalling $50,000.
2) The markets go to hades in hand basket and the value of your 401k is now $40,000.
3) You leave your employer and are eligible to rollover your 401K. So, you roll it over to a Roth IRA.
4) You do not have a loss for tax purposes since you have no cost basis in the 401k.
5) You do have taxable income of $40,000, and, therefore, you have a cost basis in the Roth IRA of $40,000.
6) If things continue to go to hades in a hand basket and the value of your Roth IRA declines to $30,000 (and assume that it is your only Roth), you could liquidate it and have a miscellaneous deduction of $10,000 subject to the 2% of AGI floor.
7) The pre-tax contributions of $50,000 to the 401k do not figure into this at all.
Also, I've heard that 401k funds cannot be converted to Roth IRA in parts. All 401k funds must be converted at once, in total, preventing taxpayers from spreading conversion accross multiple years to keep it in a lower tax bracket. Is that not the case?
I will pass on that one to someone with more knowledge. Assuming that you can do a rollover, I don't believe that there is any law that requires a total rollover, but I may be wrong on that. 401k plans can have provisions above and beyond the requirements of the law and it is very possible that the plan might require a total rollover.