On December 29, 2022, Biden signed H.R.2617, the Consolidated Appropriations Act of 2023, into law. Hidden within this appropriations bill are several retirement provisions under the section named “Division T – The SECURE 2.0 Act of 2022” (PDF Page 817).
In this series, I am reviewing the major changes created by this act. This article is about “SEC. 604. OPTIONAL TREATMENT OF EMPLOYER MATCHING OR NONELECTIVE CONTRIBUTIONS AS ROTH CONTRIBUTIONS.” (starts on PDF Page 934).
Before this amendment, only the employee could elect to defer some of their compensation as Roth deferrals, and all employer contributions were pre-tax traditional contributions. Some plans, like the ones we manage, then allow the employee to do an in-service Roth conversion on vested match and employer contributed savings.
However, this amendment permits employer match contributions or employer nonelective contributions, such as the safe harbor or nondiscrimination contributions, to be made as Roth contributions.
Employer contributions are eligible for this treatment only if the contributions are “nonforfeitable,” meaning the funds are 100% vested after contribution and there isn’t a vesting schedule which might make the employee lose ownership of the assets.
For example, if your safe harbor contributions have a vesting schedule on them, then those assets would not be eligible for Roth deferral.
Note that in the amended 402A(c)(1), it still defines Roth contributions, including these employer Roth contributions, as requiring that “the employee designates” their contribution as a Roth contribution. Presumably, this means that employees will need to communicate to their employers that they would like their employer match to be a Roth deferral, otherwise it will remain traditional.
Employer matching is normally not subject to employee contribution limits. This is how a taxpayer could contribute the full tax year 2023 employee deferral of $22,500 and then the employer match of say $4,000 would sit on top of that.
Although the IRS has not released their interpretation yet, it appears that Roth employer matching will work the same way with only the amount of employee elective deferrals being limited by the 402(g) annual elective deferral limit.
Assuming that the Roth employer match behaves like the traditional pre-tax employer match, this would mean that employees would be able to contribute more assets directly to Roth accounts annually. This potentially opens up more Roth options for those whose plans don’t allow in-service Roth conversions. It also potentially saves some fees and/or processing time for those who engage in regular in-service Roth conversions.
The amendments made by this section apply to contributions made after the date of the enactment of this Act. This means that even right now in tax year 2023, you can use these provisions, though most employer plans likely aren’t ready for you to do so just yet.
For those who run a retirement plan, the next step for implementing this change is to email your plan provider. Plan documents will likely require amendments and your provider’s accounting and electronic systems may require upgrades before plan participants can utilize this feature. Some providers may also be waiting for the IRS to issue guidance on how they expect plans to implement this change before they proceed.
If you have a retirement plan where Marotta Wealth Management is your investment manager, know that we have already contacted our plan provider and are working with them on getting these features available to you and your employees. However, feel free to email us to let us know that you are interested in its implementation in your plan.
For those who are interested, you can read the specific tax law edits listed in blue below.
(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,
(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 a 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
(4) 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.
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.
(1) Designated Roth contribution
The 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 limits
The 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).
(f) Other definitions
(3) MATCHING CONTRIBUTION.—The term ‘matching contribution’ means—
(A) any matching contribution described in section 401(m)(4)(A), and
(B) any contribution to an eligible deferred compensation plan (as defined in section 457(b)) by an eligible employer described in section 457(e)(1)(A) on behalf of an employee and on account of such employee’s elective deferral under such plan, but only if such contribution is nonforfeitable at the time received.
Photo by Anastasiia Romanska on Unsplash. Image has been cropped.