Tax Break for Roth IRA Employer Contributions

The SECURE 2.0 Act has implemented two improvements for employees with 401(k) plans: 

• Employers may offer de minimis financial inducements to employees to participate in a 401(k) plan (and presumably a 403(b) plan. An example given by the Senate is a “low-dollar gift card.” The IRS has set a limit of $250 for such inducements. [This requires thorough communication between employer and internal or any external payroll processors/providers.] 

• Employers may now make their contributions to Roth plan participants on a non-tax basis, which was previously not permitted. Employees previously had to pay the taxes on pre-tax contributions that were being put into Roth accounts. These contributions are also generally free from tax withholding for Social Security and Medicare. The following advice is provided in the National Law Review:  

Tip: Employers should include designated Roth contributions (made in lieu of elective deferrals) in boxes 1, 3, and 5 for Form W-2. They should report them in box 12 using code AA (for a section 401(k) plan). Employers should report Roth matching contributions or designated Roth nonelective contributions in boxes 1 and 2a of Form 1099-R for the year in which the contributions are allocated to the individual’s account, using code G in box 7. 

• “When all else fails,” call your tax advisor.