May 5, 2025 | 4 Minute Read
SECURE 2.0 brought good news for retirement savers who prefer to save on a Roth basis. Plan sponsors of 401(k), 403(b) and governmental 457 plans can offer retirement plan participants the option to receive their employer match and/or non-elective (often referred to as Profit Sharing) contributions on either a pre-tax or Roth basis. Prior to SECURE 2.0, employer contributions were always contributed on a pre-tax basis. As a reminder, pre-tax contributions are exempt from federal and most states’ income taxation in the year that they are contributed and are then taxed when the participant takes those contributions and their earnings out of the plan. Roth contributions are taxed for federal and state income taxes in the year they are contributed and then as long as the participant has reached age 59 ½ years and their first Roth contribution was made at least 5 years prior, the participant can take those contributions and their earnings out on a tax-free basis. For a more detailed discussion of pre-tax and Roth contributions and the advantages of each, please see our article on Pre-Tax vs. Roth Retirement Contributions.
When it Becomes Effective
While this provision was effective immediately after SECURE 2.0 was signed into law on December 29, 2022, as of the writing of this article, relatively few plans have adopted it.
How it Works
Employers electing to provide the option of employer match and/or non-elective contributions to be made on either a pre-tax or Roth basis must amend their plan document to allow for this provision. Employees will need to be given the opportunity to elect whether their employer contributions will be contributed on the traditional pre-tax basis or on the newly permitted Roth basis. If employees electing to receive their employer contributions on a Roth basis will have those contributions included in their taxable income in the year that they are made. This option is only available if employer contributions are fully vested. Plans without a vesting schedule automatically meet this requirement. For plans that have a vesting schedule on their employer match or non-elective contributions, IRS Notice 2024-2 has clarified that a participant must have met the vesting service requirements to be fully vested in the employer match and/or non-elective source in order to make this election.
Pros
For retirement savers who prefer to save on a Roth basis because they expect to be in a higher tax bracket in retirement or just prefer the certainty of tax-free withdrawals, this provision can provide them with that opportunity.
Other Considerations
Employers considering offering this option in their retirement plan should consider a few things. First, they will want to ensure that their recordkeeper is equipped to track Roth employer match and/or non-elective contributions. Next, they will want to ensure that their payroll system has the ability to include these contributions in the participant’s taxable income. If you are still planning on adding this provision to your plan, you will need to amend your plan document. Lastly, you will want to educate your plan participants on the option and provide them with the opportunity to make an election.
Below you will find the order of operations in payroll for Roth Employer Matching and/or Non-Elective contributions:
| Employee Roth Contributions |
|---|
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Benefits² Administrators clients: If you have questions about allowing employer Roth contributions in your plan, we encourage you to reach out to your dedicated Retirement Analyst. They can help you determine if your recordkeeper is currently capable of tracking such contributions and if your plan document will need to be amended . They can help you better understand the difference between Roth and pre-tax contributions and how these contributions are calculated.
For non-clients or plan advisors seeking guidance: Feel free to contact Leslie Wood (lwood@benefits2llc.com) for additional information and support. Leslie can provide an overview of the SECURE 2.0 employer Roth contributions, if a plan document needs to be amended to allow for these contributions, or additional strategies for increased retirement savings.
Whether you are a current client or not, our goal at Benefits² Administrators is to ensure every plan sponsor has the knowledge and support to remain compliant and help participants succeed in building tax-efficient retirement savings.
JP Perryman, QKA
Jeremiah “JP” Perryman, QKA is the Compliance and Operations Manager at Benefits² Administrators. He has more than 15 years of experience working with qualified retirement plans.