Employer contributions as Roth

IRS Notice 2024-2 provides some guidance on this. Specifically, I want to see if you disagree with my reading of Q&A L-2:

Q. L-2: If an employee designates a matching contribution or nonelective contribution as a Roth contribution, for which taxable year is that designated Roth matching contribution or designated Roth nonelective contribution includible in the individual’s gross income?

A. L-2: A designated Roth matching contribution or designated Roth nonelective contribution is includible in an individual’s gross income for the taxable year in which the contribution is allocated to the individual’s account. The preceding sentence applies even if the designated Roth matching contribution or designated Roth nonelective contribution is deemed to have been made on the last day of the prior taxable year of the employer under section 404(a)(6) of the Code.

 It seems clear to me that the meaning of this is that "allocated" in this context means "contributed." So if in July of 2025, a profit sharing contribution is made on a Roth basis, even though it is "allocated" for 415 purposes to the 2024 plan year, it is nevertheless TAXABLE to the employee in 2025.

Any agreement/disagreement/other thoughts? Thanks.

agreed. 

I dislike that the guidance uses the term "allocated" because like you, I use it to refer to the year to which is accrued, which is not always the same as the year in which it is actually deposited. 

So when reading and discussing with others I try to remember to point out that the usage of "allocated" in this guidance is not the same as what I use with my close peers in the industry. 

So I agree, when the dollars are deposited - that is when the taxable event occurs. 

Q&A L-9 in that Notice calls for Form 1099-R information reporting on a Roth nonelective or matching contribution “for the year in which the contributions are allocated to the individual’s account.”

Recognizing that most humans use the calendar year as one’s tax year and that Form 1099-R is on calendar years—no matter which other measurement years and measures for other purposes might be involved, the Notice’s measure for tax-information reporting make sense.

Saying a designated Roth nonelective or matching contribution counts in an individual’s gross income for her tax year in which the contribution is allocated to her account enables, regarding most people, using the Form 1099-R reports to information-match income tax returns.

The thought process the IRS used to develop the rules applicable to the Roth Match and Roth Nonelective Contribution was to treat the contributions as if they were put in a participant's account as a regular contribution and then reclassified as Roth through an in-plan Roth rollover.  This approach would make the year of taxation the year in which the rollover occurred and reportable on Form 1099R.

The IRS also uses similar logic in the recently released rules for corrections applicable to Roth Catch-Up contributions.  In these rules, there is a pre-tax catch-up in a High Paid participant's account, it can be corrected by treating it as an in-plan Roth rollover in the year in which the rollover occurs and reportable on Form 1099R.

So I agree that the taxable event occurs when the dollars are deposited into the participant's account.