Employer Roth Contributions

[Tom]

I think employer Roth is irrelevant since Roth conversion is available but regardless, a client is asking.  I asked ChatGPT which came up with a completely different reporting/taxable answer than what I was expecting and I was very clear and detailed in what I was asking. 

So I saw published pieces from 2024, post IRS Notice 2024-02, from two very reputable industry sources who you all would recognize.  They indicate what makes sense to me - the employer contribution is deductible, and the contribution is taxable to the employee when allocated and reported on a 1099-R. Interestingly ChatGPT said the complete opposite on both.  I realize "employer" Roth can sometimes be construed as the employer paying the Roth amount withheld from an employee's pay.  But I couldn't have been more clear in my question to ChatGPT.

My question here is I want to make sure nothing has changed since the 2024-02 notice; Roth Employer contributions are deductible to the employer and the taxable to the employee when allocated.  Makes perfect sense to me.  

Thank you

Tom

[Paul I]

Nothing has changed, and your understanding is correct. It may be helpful to break down the administrative steps and see how the labeling of contributions changes.  Part of the confusion arises with the change in nomenclature such as saying "Roth elective deferrals" in place of "Roth contributions".

The Nonelective Employer Contribution NEC is made to the plan and deductible for the plan year to which it relates.  There is only one deposit made and there is no requirement to identify separately the NEC and Roth NEC amounts.

Regardless of how the administrative process is set up, the fundamental requirement is a participant's election to have the NEC treated as a Roth NEC must be made before the NEC is allocated to the participant's account.   

Most commonly, the allocation of the NEC will occur in the plan year following the year for which the NEC was made.  If the participant has a valid election to get a Roth NEC, then the NEC will become a Roth NEC upon allocation. The Roth NEC will be taxable to the participant in the year in which the allocation is made (and it is not taxable to the participant in the year for which the plan sponsor made the contribution.)

Plan provisions and plan administration procedures can vary on issues such as the timing for the participant to make a Roth election, and for the allocation of the NEC.  These do not change the year of deductibility of the NEC by the employer, nor the taxation to the participant in the year in which the allocation is made.

[Artie M]

Beware of AI is the first lesson here.  I have found that AI will often use "intuitive" thought as opposed to actually looking at guidance or authority.  Here, it likely responded simply with "taxable compensation ---> must be W-2 wages".  First, any contribution under a qualified plan will be deductible by employer upon contribution.  This is the whole concept behind qualified plans.... meet the rules and get the accelerated deduction.  Moreso here because the Roth employer contribution (match and nonelective) is immediately taxable.  Then, Notice 2024-2 says that it is other plan-based reporting under 1099-R.  Needs to hit income this year and not W-2 because they are not wages for withholding or FICA.  Folks who receive these Roth match/nonelectives should be told that they may wish to increase their withholding on their normal wages or make estimated tax payments.