SECURE 2.0 Roth Contribution Rules

The SECURE 2.0 Act of 2022 increased the ability to make Roth contributions

Before the SECURE 2.0 Act of 2022, a taxpayer had only two ways to contribute to a Roth account directly:

1. Contribute to a Roth IRA if they are under the relevant income limit, or

2. Contribute to a Roth designated account in a 401(k), 403(b), or 457(b) plan via the elective employee deferral (but not the employer contribution).

Contributions to a Roth IRA are reported to the taxpayer on Form 5498, IRA Contribution Information, and are not reported on Form 1040 unless the taxpayer

• Made an excess contribution and is subject to the 6% excise tax under §4973 on Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, or

• Had a nonqualified Roth distribution that may be subject to tax and/or the 10% §72(t) early withdrawal penalty on Form 8606, Nondeductible IRAs.

Employee contributions to a Roth designated account in a 401(k), 403(b), or 457(b) plan are wages subject to income tax withholding, FICA, and FUTA taxes. They are reported on the employee’s Form W-2, Wage and Tax Statement, in boxes 1, 3, and 5.

SECURE 2.0 Changes

Under §601 of the SECURE 2.0 Act, an employer can now make Roth contributions to an employee’s simplified employee pension plan (SEP) or savings incentive match plan for employees (SIMPLE) IRA. In addition, an employee can now make Roth contributions to a SIMPLE IRA or a SARSEP, which is a pre-1997 SEP that permits employee salary reduction contributions. This provision is effective for tax years beginning after December 31, 2022.

Under §604 of the SECURE 2.0 Act, an employer’s contributions to a 401(k), 403(b), or 457(b) plan can now be Roth contributions. This provision is effective for contributions made after December 29, 2022.

As with all Roth contributions, the employee must include these amounts in their gross income. The IRS issued Notice 2024-2 to clarify how these new provisions operate and how that gross income will be reported to the employee. The information below is from sections K and L of Notice 2024-2.

Employee Roth Contributions

Employee Roth contributions to a SIMPLE IRA or SARSEP are gross income to the employee and are subject to income tax withholding, FICA, and FUTA taxes. They are reported on Form W-2, box 12, using code F (for a SARSEP) or code S (for a SIMPLE IRA), and the same amounts are included in boxes 1, 3, and 5.

The employee includes the Roth contribution amount in gross income in the tax year that includes the date on which the employee would otherwise have received the salary reduction contribution as wages or salary.

Employer Roth Contributions

First, it is important to note that an employee must be fully vested in their employer’s contributions when the contribution is allocated to their account in order for it to be made as a Roth contribution.

Employer Roth contributions to a SIMPLE IRA or SEP are gross income to the employee, but they are not subject to income tax withholding, FICA, and FUTA taxes. They are reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with the total reported in boxes 1 and 2a using code 2 or 7 in box 7, and the IRA/SEP/SIMPLE checkbox in box 7 is checked.

Employer Roth contributions to a SIMPLE IRA or SEP are included in the employee’s gross income in the tax year that includes the actual contribution date.

Employer Roth contributions to a 401(k), 403(b), or 457(b) plan are treated as an employee contribution to the traditional account followed by an in-plan Roth rollover. They are reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7.

Employer Roth contributions to a 401(k), 403(b), or 457(b) plan are included in the employee’s gross income for the tax year the contribution is allocated to the employee’s account.

Additional Considerations

Since employer Roth contributions are not subject to income tax withholding, employees must increase their withholding on wage income or make estimated tax payments to pay the federal income tax on the Roth amounts and avoid a §6654 estimated tax payment penalty.

The reporting of employer Roth contributions on Form 1099-R instead of Form W-2 is likely to cause confusion as these new provisions become more widely available.

Employers do not have to wait to begin to offer the additional Roth features. An employer using any of Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution, Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution, Form 5305-SEP, Simplified Employee Pension—Retirement Accounts Contribution Agreement, Form 5305A-SEP, Salary Reduction Simplified Employee Pension— Individual Retirement Accounts Contribution Agreement, or a prototype plan document approved by the IRS, may continue to use (or begin to use) the form or document without amendment, until the IRS issues new forms or provides new guidance on prototype plan documents.

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