This article is the second in the series addressing the 81 pages of guidance on the legislation known as SECURE 2.0 (the Act) enacted on December 29, 2022, issued by the IRS on December 20, 2023 in Notice 2024-02 (Notice). The first article addressed the extension of the deadline for written amendments and de minimis financial incentives to enroll in a 401(k) or 403(b) plan. See Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. This article will address guidance on the Act’s permitting participants in a qualified plan, 403(b) plan or governmental 457(b) plan (collectively, “Plan”) to elect to have employer matching and nonelective contributions made to the Plan on an after-tax basis (Employer Roth Contributions). The provision was effective on the date of enactment of the Act.
Importantly, the Notice points out that a Plan can permit after-tax elective deferrals to be treated as Roth contributions without having to permit participants the opportunity to elect employer matching or nonelective contributions to be treated as Employer Roth Contributions. Likewise, a Plan can permit participants to elect to have matching or nonelective contributions treated as Employer Roth Contributions without permitting elective deferrals to be treated as such. Rollovers from a designated Roth account in another Plan can only be rolled over to a Roth account. Such rollovers can be rolled into the employee’s Employer Roth Contribution account under the Plan. Provided the Plan uses a safe harbor definition of compensation under Code section 415 such Employer Roth Contributions will not be considered compensation for Code section 415 purposes.
Timing of Elections. Any election to designate an Employer Roth Contribution must be made by the employee no later than when the contribution is allocated to the employee’s account under the Plan and are irrevocable when made. The Employer Roth Contribution will be includible in income of the employee in the year in which it is allocated to the employee’s account. No such designation is permitted unless the employee is 100% vested in the Employer Roth Contribution when it is allocated. Partially vested employer contributions cannot be designated Employer Roth Contributions.
Tax Treatment and Reporting. The Notice provides any designated Employer Roth Contributions are generally not considered wages subject to income tax, FICA or FUTA withholding despite the fact that they are taxable income to the employee. Therefore, affected employees will likely have to voluntarily adjust withholding or pay estimated tax payments to avoid a penalty for not paying enough taxes throughout the year. The lone exception to this general rule is that Employer Roth Contributions of employees in governmental 457(b) plans sponsored by state or local governments that are subject to FICA taxes (e.g., the entity has entered into an an agreement to be subject to the Social Security Act) will be subject to FICA when the Employer Roth Contributions are allocated because they are 100% vested.
Roth Contributions must be reported for the year allocated on a Form 1099-R as if it were the only contributions made to the participant’s account under the plan and had been directly rolled over to a designated Roth account under the plan. Thus, it is reported in boxes 1 and 2a, and box 7 with a code of “G”.
Stay tuned for upcoming articles on the Notice’s guidance on distributions to the terminally ill, correcting missed deferrals, auto-enrollment, and more.