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Ask the Experts February 7, 2023
Can Participants Elect to Designate Employer Contributions as Roth or Pretax?
Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.
Reported by PS
Q: I heard that SECURE 2.0 allows participants the ability to elect whether their EMPLOYER contributions are pretax or Roth. Is this true, and can we as a plan sponsor take action to do this right away?
Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
A: It is true. Section 604 of the SECURE 2.0 Act of 2022 allows participants in a 401(a) qualified plan, 403(b) plan or a governmental 457(b) plan to elect either pretax or Roth for their employer’s matching or nonelective contributions, if permitted by the plan. In theory, you can implement this change right away, but there are a few items to consider prior to changing your plan.
First, Section 604 requires that employer Roth contributions must be 100% immediately vested at the time of contribution. Thus, if you have a vesting schedule for your employer contribution, participants would be able to circumvent that schedule (albeit with immediate taxation of such contributions).
Second, there are action items that your recordkeeper/third-party administrator will need to take prior to being able to offer this service. It is unlikely that your recordkeeper/TPA would be able to turn on this feature immediately; instead, it will likely need time to implement this change, since it was not previously permitted in retirement plans. Not only will operating systems need to be reprogrammed, but a mechanism for making the election (e.g., paper form, electronic, or both) will also need to be implemented.
Finally, there are action items the employer will need to take to facilitate this election. This will not be the easiest election for participants to understand, so an effective communication campaign will need to be implemented. Plan sponsors will also need to amend the plan document (and update the plan’s SPD) to reflect this provision, which may be subject to the discretion of the recordkeeper if you are using their preapproved document. All in all, while you can begin the implementation process immediately, you should expect it to be months before this Roth employer contribution election becomes a reality for plan participants.
NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.
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