IRS guidance illuminates SECURE 2.0’s Roth employer contributions 

February 2, 2024

IRS Notice 2024-2, released late last year, provides needed clarity for defined contribution (DC) plan sponsors looking to implement one of the signature Roth expansions under the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328). The new provision allowing DC plan participants to designate employer matching and nonelective contributions for Roth treatment took effect with SECURE 2.0’s enactment, but key implementation questions — including on tax reporting — remained unanswered until IRS published Notice 2024-2. The notice also covers SECURE 2.0’s expansion of Roth features for simplified employee pensions (SEPs) and savings incentive match plans for employees of small employers (SIMPLE plans). However, the notice doesn’t address SECURE 2.0’s provision mandating Roth treatment for catch-up contributions by certain high-earning employees (IRS has delayed implementation of that provision until 2026 and plans to issue separate guidance before then). IRS will accept comments on the notice through Feb. 20.

Under prior law, DC plan participants could designate only their elective deferrals as Roth contributions (the notice calls these “designated Roth elective contributions”). Since Dec. 30, 2022, SECURE 2.0 allows participants in 401(k), 403(b) and governmental 457(b) plans to designate employer matching contributions — including matching contributions on qualified student loan repayments — and nonelective contributions as Roth contributions (the notice calls these “designated Roth matching contributions” and “designated Roth nonelective contributions”). Notice 2024-02 provides guidance on key implementation issues left open by the act.

The notice confirms that a plan with a qualified Roth contribution program needn’t offer every type of designated Roth contribution. This means sponsors that already allow designated Roth elective contributions don’t have to amend their plans to permit designated Roth matching or nonelective contributions.

General Roth contribution rules apply. The notice explains how the following general rules for designated Roth elective contributions under Treas. Reg. § 1.401(k)-1(f) apply to designated Roth matching and nonelective contributions:

• An employee must irrevocably elect Roth treatment for matching and nonelective contributions before they are allocated to the employee’s plan account.
• Employees must have an effective opportunity to make or change the Roth designation for future matching and nonelective contributions at least once each plan year.
• Designated Roth matching and nonelective contributions are includable in the employee’s taxable income when made and must be held in a separate designated Roth account.

Rollovers and in-plan Roth conversions. The notice clarifies that a separate account for designated Roth matching or nonelective contributions is a designated Roth account that can receive in-plan Roth conversions and eligible rollover distributions from other Roth accounts. This applies even if the plan doesn’t allow designated Roth elective contributions.

Some election issues not directly addressed. The notice doesn’t specifically address whether sponsors offering this feature must allow employees to elect Roth treatment for a portion of designated Roth matching and nonelective contributions (i.e., to make partial elections) or can make Roth treatment the default election for qualifying employees. Existing IRS guidance on designated Roth elective contributions permits but doesn’t require partial elections and allows sponsors to make Roth treatment the default. Since the notice says rules “similar to” existing requirements for designated Roth elective contributions apply, employers presumably have the same flexibility for designated Roth matching and nonelective contributions. However, IRS confirmation would be helpful.

The notice provides guidance on the following issues relating to the vesting requirement for designated Roth matching and nonelective contributions and associated nondiscrimination issues:

• Full vesting required for Roth designation. Only employees fully vested in matching or nonelective contributions (as applicable) when they are allocated can make a Roth designation for those contributions. Partially vested employees can’t elect Roth treatment for the vested portion of their contributions.
• Limited nondiscrimination relief. While offering a Roth contribution program is optional, the right to make any type of designated Roth contribution is subject to benefits, rights and features testing under Internal Revenue Code (IRC) Section 401(a)(4). However, IRS recognizes the requirement to make designated Roth matching and nonelective contributions available only to fully vested participants could disproportionately prevent nonhighly compensated employees — who may be less likely to be fully vested — from using this feature. The notice provides that a plan won’t violate IRC Section 401(a)(4) merely because employees not fully vested can’t elect Roth treatment for matching or nonelective contributions.
• Excluded from safe harbor compensation. The notice confirms that designated Roth matching and nonelective contributions aren’t compensation under certain IRC Section 415 safe harbor definitions of compensation. (Section 415 compensation is used for determining the annual limit on DC plan contributions, identifying highly compensated employees and other nondiscrimination testing purposes.)

Designated Roth matching and nonelective contributions are includable in an employee’s income when made. However, SECURE 2.0 doesn’t specify how or when to report these amounts for income tax purposes (e.g., as Form W-2 wages or instead on Form 1099-R). The law also doesn’t say whether these amounts are subject to Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) or federal income taxes. Notice 2024-2 provides clarification on these issues.

• Includable in the year of allocation. The notice confirms that designated Roth matching and nonelective contributions are includable in an employee’s income in the year the contributions are allocated to the employee’s plan account. This treatment applies even if the contributions are deemed made on the last day of the employer’s prior tax year for the employer’s tax purposes.
• Reportable on Form 1099-R. Designated Roth matching and nonelective contributions are reportable on Form 1099-R. IRS instructs filers to report the aggregate amount of such contributions made to a participant during the year in boxes 1 and 2a and use code G in box 7.
• No federal tax withholding. Designated Roth matching and nonelective contributions are excluded from wages for federal income tax withholding purposes. However, IRS indicates that employees electing Roth treatment may need to adjust their tax withholding elections or make estimated tax payments to account for the tax due on these amounts. Sponsors may want to communicate this point to eligible employees.
• FICA and FUTA treatment. Like matching and nonelective contributions made on a pretax basis, designated Roth matching and nonelective contributions under qualified and 403(b) plans aren’t wages for FICA or FUTA purposes. Designated Roth matching and nonelective contributions made to an eligible governmental plan aren’t wages for FUTA purposes but sometimes may be FICA wages.

Before SECURE 2.0, SEPs and SIMPLE IRAs could only accept contributions made on a pretax basis to a traditional IRA. Starting in 2023, SEPs and SIMPLE IRAs can allow employees to designate a Roth IRA to receive contributions (the notice calls this a “Roth contribution election”). The notice provides guidance for these plans to implement this Roth expansion.

The notice confirms SEPs and SIMPLE IRAs don’t have to offer Roth contribution elections. Sponsors that wish to do so can continue using existing IRS forms or approved prototype plan documents until IRS releases updates. The notice also provides the following guidance for arrangements offering Roth contributions:

• Roth election requirements. Employees must make affirmative Roth contribution elections before the contribution is made (default Roth elections aren’t permitted). For SIMPLE IRA plans and salary-reduction SEPs (SARSEPs) established before 1997, employees must have the same effective opportunity to make Roth contribution elections as they have to enter into salary-reduction agreements. For SEPs without salary deferrals, employees must have an effective opportunity to make a Roth contribution election at least once each plan year.
• Roth salary-reduction contributions. Tax and reporting requirements for Roth salary-reduction contributions to SIMPLE IRAs and SARSEPs generally parallel existing rules for designated Roth elective contributions. Roth salary-reduction contributions are includable in an employee’s income in the tax year the employee otherwise would have received the amounts as wages absent the contribution election. These contributions are reportable on Form W-2 and subject to federal income, FICA, and FUTA taxes.
• Roth employer contributions. Tax and reporting requirements for Roth employer contributions align with the notice’s other guidance on designated Roth matching and nonelective contributions. Roth employer matching and nonelective contributions to SEPs and SIMPLE IRAs are includable in the tax year the contributions are made, even if deemed made on the last day of the employer’s prior tax year. These contributions are reportable on Form 1099-R and are not subject to federal income, FICA or FUTA taxes.

A drafting error in the act inadvertently removed preexisting language providing that contributions to these arrangements don’t count against an employee’s contribution limit to a separate Roth IRA. A letter last summer from key House and Senate committee leaders made Treasury and IRS aware of plans to fix to this error, but IRS deferred addressing the Roth IRA contribution limit issue in the notice. (A recently released draft bill would implement the technical correction.)

The notice extends the plan amendment deadline for SECURE 2.0’s provisions to Dec. 31, 2026 (governmental and certain collectively bargained plans may have later dates). This deadline applies to sponsors that offer designated Roth matching or nonelective contributions before that date. For sponsors that first offer designated Roth matching or nonelective contributions after the amendment deadline, the usual discretionary amendment timing rule will apply (i.e., amendments will be due by the end of the plan year in which the sponsor first offers the option).

• Notice 2024-2 (IRS, Dec. 20, 2023)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)

• User’s guide to SECURE 2.0 (regularly updated)
• Lawmakers release SECURE 2.0 corrections bill for beta testing (Jan. 12, 2024)
• After empty 2023 RA List, IRS delays amendment deadlines for new laws (Dec. 21, 2023)
• IRS delays SECURE 2.0’s Roth catch-up mandate until 2026 (Aug. 29, 2023)
• Implementing SECURE 2.0’s Roth provisions may tax DC plan sponsors (April 11, 2023