Most are familiar with Roth elective deferrals in a 401(k) Plan or 403(b) Plan. Roth elective deferral contributions have been permitted in qualified retirement plans since 2006. Section 604 of SECURE 2.0 provided for an optional provision that allows employees to designate their employer contributions, whether it be matching nonelective, as Roth. This applies to 401(k) Plans and 403(b) Plan. This was effective December 29, 2022; however, several challenges delayed implementation of this provision.
What are the requirements?
Before the employer contribution is deposited into the plan, the participant must designate the contribution as Roth. That designation is irrevocable, meaning they can’t change their mind once the contribution is made. The participant must have the ability to change their election at least once during each plan year. The contribution is includable in the participant’s gross income for the taxable year in which the contribution is deposited to the plan and is reported on a Form 1099-R. Only participants who are fully vested can elect to have their employer contributions designated as Roth.
Plan Sponsor considerations
Plan sponsors are not required to permit Roth employer contributions, even if they permit Roth deferrals. Profit sharing only plans, even though no Roth elective deferral designation is permitted, are allowed to offer Roth employer contribution designations. If the plan sponsor provides for both matching and nonelective contributions, there is no requirement to allow the Roth designation for all employer contributions. Since the participant must make the designation of the contribution before it is deposited, how does this impact plan sponsor communication to the participants? Plan sponsors will need to verify vesting is correct at the recordkeeper to ensure only fully vested participants are designating their employer contributions as Roth.
Impact on recordkeeping systems
If not already in place, recordkeeping platforms are programming their systems to support the Roth designation of employer contributions. Now that we have more guidance, this could become a more popular plan feature that recordkeepers need to accommodate. Systems are going to have to be in place to account for these contributions separately from traditional employer contributions. There must be an option to allow separate designations between the different types of employer contributions. There will also be the need to accurately track contribution elections and the dates of the deposits to properly issue Forms 1099-R.
Please contact us if you want to arrange a consultation for additional guidance and practical considerations.
