SECURE 2.0, Sec. 604 Employer contributions as Roth

How are folks interpreting this section?

I recognize it is optional, but because its effective now, there seems to me a lot of questions about it. 

Let's start with a basic 401(k) plan, that has a basic safe harbor match provision. 

There are two options coming up - 

1. The employer would make a blanket decision to have the safe harbor contributions as Roth. Can this be a yearly election? What if it's just the annual discretionary employer contribution (profit sharing) does it have to be in the plan document that the employer contributions for year 20XX will be designated Roth Contributions? 
2. Each individual participant would elect if they wanted the SH contribution made as Roth or not. 

For item 2- I'm not seeing anything in section 604 where the the participants get to elect one way or the other. Plus plans can already accomplish pretty much the same thing if they allow for in-plan Roth conversions. 

I think #1 is how I am interpreting 604, which will be useful for plans that have an auto-enroll feature where the default enrollment is a Roth deferral, so any match will also be Roth. 

I can see the plan issuing 1099-R at year end for the amounts of the Roth contributions that weren't Roth deferrals. 

What say all of you? 

I thought this was at the employee's election, if offered as on option by the employer. The employer forcing its contributions as Roth just doesn't seem palatable to me. I haven't plugged in the replacement language to the existing code language (I hate the way they do that), but maybe subsections (b)(1) and/or (2) have that effect (i.e., employee's election).

1 hour ago, justanotheradmin said:

For item 2- I'm not seeing anything in section 604 where the the participants get to elect one way or the other.

You need to look at IRC 402A(b)(1) as amended by S2.0 sec. 604.

This is what IRC 402A(b)(1) said pre-S2.0:

Quote

The term “qualified Roth contribution program” means a program under which an employee may elect to make designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make under the applicable retirement plan.

And as amended:

Quote

The term “qualified Roth contribution program” means a program under which an employee may elect to make, or to have made on the employee's behalf, designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make, or of matching contributions or nonelective contributions which may otherwise be made on the employee's behalf, under the applicable retirement plan.

With the amended language it is clear that the Roth employer contributions are made at the employee's election.

1 minute ago, C. B. Zeller said:

With the amended language it is clear that the Roth employer contributions are made at the employee's election.

This is the only reasonable way this provision can work.  If left completely to Employer discretion, the Employees will get stuck with the tax liability without having a say.

That said, I think you can reasonably read the amended language as simply allowing match and NEC as contributions that may be made as Roth, without the election wording from the first part of the sentence. 

25 minutes ago, C. B. Zeller said:

it is clear that the Roth employer contributions are made at the employee's election

Thanks Corey, I'm still recovering from a SECURE 2.0 hangover, appreciate you doing the legwork on this one!

Aren't all contributions to a defined contribution plan on the employee's behalf though? is it the "on the employee's behalf" wording in 409A that is the crux? 

I also don't see the point if it is ONLY at the participant's election. Plans could effectively (though perhaps not as streamlined) allow for in-plan Roth conversions. If that is the point then why have Sec 604 at all? 

One more thought - is the point of Sec 604 that an employer could say - the contributions are going in as Roth, unless you as participant elect otherwise?

That now plans can make the default for employer contributions Roth, instead of pre-tax? That would still allow participants an election, just the flip of what was allowed pre-SECURE 2.0

12 minutes ago, justanotheradmin said:

Aren't all contributions to a defined contribution plan on the employee's behalf though? is it the "on the employee's behalf" wording in 409A that is the crux? 

Taking out the bits about deferrals, I'm reading it as, "an employee may elect ... to have made on the employee's behalf designated Roth contributions in lieu of all or a portion of ... matching contributions or nonelective contributions which may otherwise be made on the employee's behalf"

15 minutes ago, justanotheradmin said:

I also don't see the point if it is ONLY at the participant's election. Plans could effectively (though perhaps not as streamlined) allow for in-plan Roth conversions. If that is the point then why have Sec 604 at all? 

This is correct. That's our Congress for you

By the way, did they flesh out the timing rules on that?  Company match could go in as late as 10/15 the following year, but participants aren't going to wait to see how it affects their tax returns they filed for 4/15.

I'm suspecting it's the date of deposit, rather than the as-of date of the allocation, so that 10/15 match deposit the following year doesn't count as something for the previous 12/31.

Okay, upon closer reading I think I agree with all of you, but maybe not for quite the same reason, but I don't think that matters. I think its based in 402A(c)(1)(B), which was not amended under SECURE 2.0. "the employee designates (at such time and in such manner as the Secretary may prescribe) as not being so excludable."  See below. 

I still think its pointless if that's all that it is. Plans could effectively allow that already. 

(a)General rule

If an applicable retirement plan includes a qualified Roth contribution program—

(1) any designated Roth contribution made by an employee pursuant to the program shall be treated as an elective deferral for purposes of this chapter, except that such contribution shall not be excludable from gross income, and

(2) any designated Roth contribution which pursuant to the program is made by the employer on the employee’s behalf on account of the employee’s contribution, elective deferral, or (subject to the requirements of section 401(m)(13)) qualified student loan payment shall be treated as matching contribution for purposes of this chapter, except that such contribution shall not be excludable from gross income,

(3) any designated Roth contribution which pursuant to the program is made by the employer on the employee’s behalf and which is a nonelective contribution shall be nonforfeitable and shall not be excludable from gross income, and

(24) such plan (and any arrangement which is part of such plan) shall not be treated as failing to meet any requirement of this chapter solely by reason of including such program.

(b)Qualified Roth contribution program

For purposes of this section—

(1)In general

The term “qualified Roth contribution program” means a program under which an employee may elect to make, or to have made on the employee’s behalf designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make, or of matching contributions or nonelective contributions which may otherwise be made on the employee’s behalf, under the applicable retirement plan.

(2)Separate accounting required

A program shall not be treated as a qualified Roth contribution program unless the applicable retirement plan—

(A) establishes separate accounts (“designated Roth accounts”) for the designated Roth contributions of each employee and any earnings properly allocable to the contributions, and

(B) maintains separate recordkeeping with respect to each account.

(c)Definitions and rules relating to designated Roth contributions

For purposes of this section—

(1)Designated Roth contributionThe term “designated Roth contribution” means any elective deferral , matching contribution, or nonelective contribution which—

(A) is excludable from gross income of an employee without regard to this section, and

(B) the employee designates (at such time and in such manner as the Secretary may prescribe) as not being so excludable.

(2)Designation limitsThe amount of elective deferrals which an employee may designate under paragraph (1) shall not exceed the excess (if any) of—

(A) the maximum amount of elective deferrals excludable from gross income of the employee for the taxable year (without regard to this section), over

(B) the aggregate amount of elective deferrals of the employee for the taxable year which the employee does not designate under paragraph (1).

Derrins first post-passing S2.0 webinar is later today, will be interesting to hear what he says.

Personally, I think we will need IRS guidance to clear up how this section will work in practice.  

So, since employer contributions are not usually includible in FICA wages, doesn't this mean that the Roth employer contributions will be includible in gross income for income tax purposes, but will not be includible as wages for FICA?  

1 hour ago, bito'money said:

So, since employer contributions are not usually includible in FICA wages, doesn't this mean that the Roth employer contributions will be includible in gross income for income tax purposes, but will not be includible as wages for FICA?  

 

Correct. I anticipate plans will have to issue a 1099-R at year end for employer amounts contributed as Roth, the same as is done for in-plan roth conversions.