For years, employees who wanted to diversify the tax treatment of contributions to their 401(k) or 403(b) plan accounts could elect to have their own deferrals made on a Roth basis, but all employer contributions had to be made on a pre-tax basis. SECURE Act 2.0 changed that, allowing employers to make matching or nonelective employer contributions to participant accounts on a Roth basis at the participant’s election. This means that participants who elect to have employer contributions made as Roth will owe income tax on the contributions when allocated, but will avoid taxation on the ultimate qualifying distributions of principal and income. However, it has been unclear how the election would affect tax administration for the participant in the year of contribution. As a result, some employers have been hesitant to amend their plans to allow these Roth employer contributions.
In Notice 2024-02, the IRS addressed some of these administrative questions, providing guidance on the reporting and taxation of designated Roth employer contributions. It provides that designated Roth matching contributions and designated Roth nonelective contributions must be reported on Form 1099-R for the year in which the contributions are allocated to the participant’s account. The total amount of such contributions that are allocated in a year are reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7. Notably, these contributions are not reported on a participant’s Form W-2, which is a similar structure to the already existing Roth in-plan rollover option that many plans have adopted. Notice 2024-02 also says that designated Roth matching contributions and designated Roth nonelective contributions are not wages, as defined in Internal Revenue Code section 3401(a), for purposes of federal income tax withholding under section 3402, and are not wages for purposes of FICA or FUTA (the rules may be different for eligible governmental plans).
Notice 2024-02 offers helpful guidance on Roth employer contributions under SECURE Act 2.0, in terms of tax reporting and beyond, and any employer considering adding this feature to its 401(k) or 403(b) plan should review the guidance carefully. Contact Kelly Smith Hathorn for more information.