Roth Employer Contributions
Learn how Roth employer contributions work under SECURE Act 2.0.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in New Hampshire is representative of a common question on matching contributions as Roth under SECURE Act 2.0.
“A client is considering whether to add the new Roth-treatment option for employer matching contributions to the company’s 401(k) plan. Can you explain how this provision would work?”
Highlights of the discussion
One of the new Roth options under SECURE Act 2.0 that plan sponsors may, but are not required to, adopt is the ability for a participant to elect to receive their employer matching and nonelective contributions as Roth contributions. Before Section 604 of SECURE Act 2.0, only employee salary deferrals could be designated as Roth contributions. Now, employer matching contributions, including safe harbor contributions, and nonelective contributions, can be made as Roth contributions if the plan permits. IRS Notice 2024-02 provided guidance on this option.
Some of the key considerations plan sponsors should be aware of are as follows:
Participants must designate which employer contributions should be Roth contributions before they are made.
The plan must hold such contributions in a separate Roth account.
Participants must have the ability to change their election to have their employer contributions made as Roth contributions at least once each year.
Elections made by employees must be irrevocable once the contribution is deposited as a Roth contribution.
Participants must be fully vested in the employer contributions before being able to make them as Roth contributions (so no vesting schedules can apply). Note: Even though participants who are not fully vested cannot elect Roth treatment for employer contributions, the IRS will not consider this restriction as discriminatory.
The plan reports Roth employer contributions made in this manner on IRS Form 1099-R in the year the contribution is allocated.
Roth employer contributions are includible in the participant’s gross income in the year contributed but are not treated as wages for federal income tax withholding, FICA, or FUTA purposes.
Conclusion
Before implementing the Roth-treatment option for employer contributions, plan sponsors should check with their recordkeepers or TPAs to ensure the administrative system has been updated to support the process. If allowed under a 401(k) plan, participants who elect to treat their employer contributions as Roth contributions may realize tax benefits. A discussion with a tax or financial advisor should be part of the decision-making process. For those plans already operating with this provision, the deadline to amend the plan to include this optional feature is December 31, 2026.
