On December 20, 2023, the IRS issued Notice 2024-2, which provides question-and-answer guidance on various aspects of the SECURE 2.0 Act. This post focuses on the ability to make employer contributions (match or nonelective) as Roth contributions under SECURE 2.0 Act Section 604. (For an overview of SECURE 2.0 for defined contribution plan sponsors, click here.)
Overview of SECURE 2.0 Language on Employer Roth Contributions
Section 604 SECURE 2.0 Act permits employers to make employer contributions, both matching and nonelective contributions, as Roth contributions to a 401(k), 403(b), or 457(b) plan. To be designated as a Roth contribution, the employer contribution must be fully vested (nonforfeitable) when made. The Roth contribution is not excluded from gross income. The ability to make Roth employer contributions was effective with respect to employer contributions made after December 29, 2022, the date of enactment of the SECURE 2.0 Act.
IRS Guidance on Roth Employer Contributions
Notice 2024-2 provides the following guidance on Roth Employer Contributions:
- Like Roth elective deferrals, the election to designate the employer contribution as a Roth contribution must be made no later than the date the contribution is allocated to the employee’s account.
- If employees are given the ability to elect to have the employer contributions made as Roth, they must also be given the opportunity to change such election with respect to future contributions at least once per year.
- The Roth employer contribution is includable in the employee’s income in the year that the contribution is allocated to the employee’s account. This is true even when the employer contribution is deemed to have been made for the prior plan year.
- If an employee is only partially vested in an employer contribution account, then the employee cannot designate any portion of the employer contribution as Roth. For example, employees who are 50% vested in their matching contribution account cannot designate 50% of the employer contribution as Roth ‑ the entire amount must remain pre-tax.
- Only allowing employees with fully vested accounts to designate employer contributions as Roth will not be a violation of the other benefit rights and features rules in Code § 401(a)(4), notwithstanding that nonvested participants are not allowed to elect Roth contributions.
- Roth employer contributions are excluded from wages under Code § 3401(a) (and therefore are not reported as box 1 income on Form W-2), and are not subject to the income tax withholding requirements under Code § 3402.
- Roth employer contributions are not considered FICA wages subject to payroll taxes for purposes of 401(k) and 403(b) plans.
- For a governmental 457(b) plan, if social security and Medicare taxes apply to such employee, then the Roth employer contributions are subject to Social Security and Medicare taxes at the time they are allocated to the employee’s account (the same as the pre-tax employer 457(b) plan contributions). The amounts are not subject to FUTA.
- Roth employer contributions are to be reported by the plan as taxable income on Form 1099-R (with code “G” in box 7) for the year in which they are allocated to the employee’s account. No income tax withholding will occur.
- This will require some tax planning on behalf of an employee, particularly when the employer contributions for one plan year are actually allocated in the following plan year.
- A plan that allows Roth elective deferrals does not have to add a Roth employer contribution election feature.
If you have any questions, please reach out to your Faegre Drinker benefits counsel.
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