SECURE 2.0 Act – Section 604. Optional Treatment of Employer Matching or Non-elective Contributions as Roth Contributions

SECURE 2.0 Act – Section 604. Optional Treatment of Employer Matching or Non-elective Contributions as Roth Contributions

Historically, employers were not permitted to provide employer matching or nonelective contributions in their 401(k), 403(b), and governmental 457(b) plans on a Roth (i.e., post-tax) basis. These types of employer contributions were allowed only on a pre-tax basis.

Under a new provision of the SECURE 2.0 Act (SECURE 2.0), effective immediately, plans may now allow participants to elect to receive matching and nonelective contributions on a post-tax basis. 

Employees should be aware that an election to receive contributions on an after-tax basis will trigger current taxation despite the fact that the employer contributions are not currently distributable from the plan. Any designated Roth contribution made by the employer on the employee’s behalf are required to be included in the employee’s taxable wages as reported on Form W-2.

Additionally, any nonelective designated Roth contributions made by the employer are required to be fully vested.

This new provision gives employees greater control over the tax treatment of their workplace retirement savings dollars.  Employees should carefully weigh whether it makes financial and tax sense to receive these employer contributions on a pre or post tax basis. 

The answer depends on several assumptions and detailed analysis including current and future tax rates coupled with future growth, the impact of receiving some portion of their future retirement distributions as permanently tax-exempt (dependent upon the earnings growth on the dollars contributed) or taxable. 

The long-term benefit to younger employees of this option may out-weigh the current tax inclusion in employees’ income of the employer’s matching contribution.  

These new rules are effective immediately as of the date of enactment.

If you have any questions about SECURE 2.0, please contact a member of the Schneider Downs Retirement Solutions team at [email protected].

This article is part of a series highlighting the impact of the SECURE 2.0 on retirement plan sponsors, participants and retirees. You can view our full catalog of SECURE 2.0 articles here or download our comprehensive SECURE 2.0 eBook here.

About SECURE 2.0

SECURE 2.0 was signed into law by President Biden on Dec. 29, 2022, as part of a $1.7 trillion omnibus spending bill.

This massive piece of legislation builds on the foundation that was laid by the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act to further improve upon the success of the private employer-based retirement system by making it easier for businesses to offer retirement plans and for individuals to save for retirement.

The full text of SECURE 2.0, including provisions that affect pension and cash balance plans, may be found on pages 2,046-2,404 of the omnibus Consolidated Appropriations Act of 2023.

About Schneider Downs Retirement Solutions

Schneider Downs Retirement Solutions has experience in all facets of qualified and non-qualified plan delivery, which allows us to be flexible to the needs and direction of our clients. Our specialized team of advisers and consultants provide objective advice and expertise to help plan sponsors govern their retirement plans appropriately, mitigate risk, improve participant outcomes and support efficient and compliant plan operations. 

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.