Electing Roth Treatment for Employer Retirement Plan Contributions

One of the most significant retirement planning enhancements introduced by the SECURE 2.0 Act of 2022 is the ability for employees to elect Roth tax treatment for certain employer retirement plan contributions. While Roth 401(k) deferrals have been available for years, SECURE 2.0 expands this framework by allowing employer matching and nonelective contributions to be treated as Roth contributions — provided the plan sponsor offers the feature and the employee affirmatively elects it.

This change introduces meaningful planning flexibility, particularly for high‑income earners focused on long‑term tax diversification. At the same time, it brings new tax and reporting considerations that should be evaluated carefully before making an election.

What changed under SECURE 2.0

Prior to SECURE 2.0, all employer contributions — whether matching or profit‑sharing — were required to be allocated to a pre‑tax account, even when matched against Roth employee deferrals. Effective upon enactment of the law on Dec. 29, 2022, defined contribution plans such as 401(k), 403(b), and governmental 457(b) plans may now allow employees to designate employer matching or nonelective contributions as Roth employer contributions rather than pre‑tax contributions.

Although this provision has technically been available since enactment, many employers and recordkeepers delayed adoption while payroll systems were updated and additional guidance was issued. The Internal Revenue Service addressed many of these outstanding questions in IRS Notice 2024‑2, providing operational clarity that has accelerated broader implementation.

Importantly, this provision is optional. Plan sponsors are not required to offer Roth employer contributions, and employees are not obligated to elect Roth treatment even when the feature is available.

How Roth employer contributions work

When permitted by the plan, an employee must make an irrevocable election for Roth treatment before the employer contribution is allocated to the participant’s account. Plans must also provide employees with the opportunity to make or change this election at least once per year.

Several key requirements apply:

• Employer contributions designated as Roth must be 100% vested immediately when made.
• The contribution is taxable income to the employee in the year it is contributed.
• Amounts are deposited into a designated Roth account within the plan, tracked separately from pre‑tax sources.

When IRS holding period rules are satisfied, qualified distributions in retirement — including both principal and earnings — are tax‑free, consistent with other Roth retirement accounts.

What documentation should employees expect?

Unlike employee Roth deferrals, taxes are not withheld through payroll on Roth employer contributions. Instead, the income is recognized after the fact for the year of contribution, which can result in an unexpected tax liability if estimated payments or withholding are not adjusted in advance.

Because of this, advance planning and coordination with a financial or tax advisor is especially important before making a Roth election.

Form 1099‑R reporting

The IRS has confirmed that Roth employer contributions are reported on Form 1099‑R, not on Form W‑2. The total annual amount appears in Box 1 and Box 2a, with Code “G” in Box 7. This mirrors the reporting used for in‑plan Roth conversions and often surprises employees who expect all retirement‑related income to appear on their W‑2.

Plan election and disclosure materials

Employees should also expect to receive:

• Plan election forms confirming the Roth designation,
• Summaries of Material Modifications (SMMs) describing the new feature, and
• Annual or quarterly account statements showing Roth employer contributions tracked separately from pre‑tax balances.

Reviewing and retaining these materials is important for accurate tax reporting and long‑term recordkeeping.

Conclusion

The ability to apply Roth tax treatment to employer retirement plan contributions adds a new lever to the retirement planning process. When used strategically, it can enhance tax diversification, help manage future required minimum distributions, and provide additional flexibility for retirement income and estate planning.

However, the upfront tax cost and unique reporting mechanics mean this is not a one‑size‑fits‑all decision. For many professionals in their peak earning years, a thoughtful analysis of current income, projected tax rates, and cash‑flow considerations is essential before making the election.

As with other opportunities introduced by the SECURE 2.0 Act, the most effective outcomes come when Roth employer contribution elections are integrated into a broader, long‑term financial plan aligned with personal goals and tax strategy. Talk to your wealth advisor or contact us to learn how we can integrate your employer contributions into your overall financial plan.