The IRS has issued guidance for how employer designated Roth contributions should be reported. (Notice 2024-2, December 20, 2023.)
SECURE 2.0 Act enabled employees to elect for employer contributions (including employer matching contributions and other contributions) to employer-sponsored retirement accounts, including SEPs, SIMPLEs, 401(k) plans, and other nongovernmental and governmental plans, to be designated Roth contributions, effective for taxable years beginning after December 31, 2022 for SEPs and SIMPLEs and and for contributions made after December 29, 2022 for other retirement plans.
This is one of the most significant features of the Act, substantially expanding potential Roth contributions to retirement accounts of employees and self-employed persons.
(Remember, in exchange for giving up a current deduction or exclusion from income for contributions to a Roth account, future distributions from the account to the employee or the employee’s successors are potentially tax-free.)
In order to qualify, the employer’s plan must permit this type of contribution, so employer retirement plans have to be amended to include those provisions. It’s optional, not mandatory, for employers to offer this feature for their retirement plans.
The contribution is taxable for the employee for the year the contribution is made or allocated to the employee’s account, and deductible for the employer for the plan year the contribution relates to. (The employer might be able to deduct the contribution the year before the employee is taxed on it.) For example, an employer could deduct a retirement account payment for 2023 made up to the extended due date of its corporate income tax return on October 15, 2024 on it’s 2023 corporate income tax return. The employee would report the payment on the employee’s 2024 individual income tax return.
For employers, the decision to permit designated Roth contributions is significant because the contributions must be fully vested. (The employee can’t lose the benefit.) Other employer contributions can have vesting schedules apply to them, with the possibility of reducing the employer’s cash requirement to fund the plan. (SEP and SIMPLE accounts are also fully vested, so no effect for them.)
The designated Roth contribution payment by the employer is treated as if it was contributed to the employee’s regular retirement account and immediately converted to a Roth account. For SEPs and SIMPLEs, Notice 2024-2 states an employee’s IRA accounts are treated as having no nondeductible contributions previously made to them, so the total contribution is taxable. That’s not stated for other retirement accounts, but it makes sense for that to be the case.
Contributions are reported on an information return, Form 1099-R, as if they were distributions from the account. For SEPs and SIMPLEs, the total is reported in boxes 1 and 2a of Form 1099-R, using code 2 or 7 in box 7, and the IRA/SEP/SIMPLE checkbox in box 7 checked. For other retirement plans, the total is reported in boxes 1 and 2a of Form 1099-R, and code G is used in box 7.
Since the designated Roth contributions are made by the employer, they aren’t considered wages of the employee and aren’t subject to employment taxes or income tax withholding.
In contrast, employee Roth 401(k) contributions are subject to employment taxes and income tax withholding, and are reported on the employee’s Form W-2.
Employees with employer designated Roth contributions should plan to pay additional income taxes by increasing their withholding or making estimated tax payments.
For 2023, Form 1099R must be filed on paper by February 28, 2024 or efiled by April 1, 2024. You can get an automatic 30-day extension of time to file by completing Form 8809 and submitting it to the IRS by the due date of the returns.
For additional information about these requirements, see your tax advisor and your retirement account administrator.