The SECURE 2.0 Act introduces a significant change allowing participants in 401(k), 403(b), and 457(b) plans to opt for employer contributions to be treated as Roth contributions, as detailed by Alison J. Cohen, Esq., of Ferenczy Benefits Law Center LLP. Section 604 of the Act permits employees to elect to treat fully vested employer contributions as Roth contributions for tax purposes, regardless of whether the plan offers employee Roth deferrals. This provision has caught the attention of industry experts like those at the American Retirement Association (ARA) and employer benefits plan administrators such as Watkins Ross. Robert Richter, ARA Retirement Education Counsel, mentions that similar tax effects have been achievable through in-plan Roth rollovers for some time.
Under SECURE 2.0, participants can change their Roth designation for employer contributions annually, with the election being irrevocable once made. However, participants must be fully vested in matching or nonelective contributions to opt for the Roth designation. It is crucial to understand the tax implications to avoid unexpected liabilities, according to Richter. Employer contributions designated as Roth are included in taxable income but are exempt from federal income taxes, withholding, and FICA or FUTA taxes, except potentially for governmental 457(b) plans under specific conditions. Adjustments to withholding for Roth contributions must be managed at the payroll level, posing challenges if contributions are allocated annually rather than per payroll cycle, as highlighted by Robert M. Kaplan, ARA Director of Technical Education.
Implementation of this provision requires robust recordkeeping systems capable of handling designated Roth contributions separately from pre-tax contributions and Roth deferrals, necessitating coordination with payroll professionals and recordkeepers, advises Watkins Ross. Communication and education are essential for informing participants about Roth contributions and their tax implications, with TPAs playing a pivotal role in employer education efforts. While the SECURE 2.0 Act offers significant flexibility, it also introduces complexities requiring careful administration and clear communication to ensure compliance and successful implementation. Ongoing IRS guidance clarification, such as through IRS Notice 2023-62, supports reporting on Form 1099-R rather than W-2, easing payroll impacts aside from withholding adjustments.
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