IRS SECURE 2.0 “Grab Bag” Guidance – Roth employer contributions

On December 20, 2023, IRS released Notice 2024-02, “Grab Bag” guidance on certain provisions of SECURE 2.0. We are going to do a series of brief articles on Grab Bag guidance of particular interest to sponsors of tax qualified retirement plans, including SECURE 2.0 provisions with respect to:

  • Optional treatment of employer matching or nonelective contributions as Roth contributions.

  • For cash balance plans using a variable interest crediting rate, allowing use of a reasonable projection of that variable interest crediting rate, not to exceed 6 percent.

  • Plan startup/contribution incentives.

  • Other Grab Bag guidance.

We begin with employer Roth contributions.

Optional treatment of employer contributions or nonelective contributions as Roth contributions

SECURE 2.0 allows DC plan sponsors to provide participants the option to take matching or nonelective employer contributions on a Roth basis, effective as of December 29, 2022. With respect to this new provision, the Grab Bag notice provides the following guidance:

  • Sponsors may but are not required to include in their plan any type of Roth contribution – employee elective, employer matching, or employer nonelective.

  • The rules currently (pre-SECURE 2.0) applicable to employee elective Roth contributions also generally apply to the new Roth employer contributions. Thus, designation of an employer contribution as a Roth contribution “must be made by the employee no later than the time that the contribution is allocated to the employee’s account and must be irrevocable,” Roth employer contributions “are subject to inclusion treatment and separate accounting rules,” and the employee must be able to make or change the designation at least once a year.

  • The employer Roth contribution is included in income in the year it is allocated to the participant’s account (even, e.g., where the contribution is “deemed to have been made” for the prior year).

  • Only fully vested employer contributions may be designated Roth contributions.

  • Employer Roth contributions are not subject to federal income tax withholding under IRC section 3402 and are not wages under IRC section 3121(a), for purposes of FICA, or IRC section 3306(b), for purposes of FUTA.

  • Employer Roth contributions “must be reported using Form 1099-R for the year in which the contributions are allocated to the individual’s account. The total amount of designated Roth matching contributions and designated Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, and code ‘G’ is used in box 7.”

  • Employer Roth contributions are not included in the IRC section 415 safe harbor definition of compensation.

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In our next article we will discuss the new SECURE 2.0 cash balance provision, including available relief from IRC anti-cutback rules for plans switching to a variable interest crediting rate.