Ask the Experts January 23, 2024

How Are Employers’ Roth Contributions Reported for Participants’ Income Taxes?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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Q: Our retirement plan allows an employee to designate employer contributions as Roth. If an employee elects to have his/her employer match deposited as Roth, does the amount get reported on a W-2 or 1099 for tax purposes?

A: This is a timely question, as the issue was specifically addressed in the recently issued IRS Notice 2024-2. In that notice, Section L-9 offers a helpful Q&A regarding the reporting and taxation of designated Roth employer contributions:

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  1. If designated Roth matching contributions or designated Roth nonelective contributions are allocated to an individual’s account in a taxable year, what reporting obligations apply to those contributions?
  2. The reporting obligations that apply to a designated Roth matching contribution or designated Roth nonelective contribution are the same as if: (1) the contribution had been the only contribution made to an individual’s account under the plan, and (2) the contribution, upon allocation to that account, had been directly rolled over to a designated Roth account in the plan as an in-plan Roth rollover. Thus, designated Roth matching contributions and designated Roth nonelective contributions to a qualified plan under section 401(a) or to a section 403(b) plan must be reported using Form 1099-R for the year in which the contributions are allocated to the individual’s account. The total amount of designated Roth matching contributions and designated Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7.

Thus, Form 1099-R, and not Form W-2, is used for tax reporting.

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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Compliance January 22, 2024

How the DOL’s Auto-Portability Proposal Works

Service providers could charge a fee directly to an IRA owner for executing a transfer to their new qualified plan.

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Service providers would be permitted to charge a reasonable fee to transfer the assets of individual retirement account holders to a new employer-sponsored plan under a proposal published Friday by the Department of Labor.

Below, PLANSPONSOR delves into the details of the proposed rule, which will be up for a 60-day public comment period once filed in the Federal Register.

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No Affirmative Consent Needed

When a worker leaves an employer, if the worker’s retirement account balance was less than $7,000, the sponsor may distribute that sum to a default IRA. The balance in that default IRA may then be transferred to the worker’s new retirement plan, assuming they have one. A service provider may make this default IRA-to-plan rollover without the participant’s affirmative consent “after such individual has been given advance notice of the transfer and has not affirmatively opted out of such transfer.”

The DOL notes in its proposal that this process increases “the risk of funds becoming lost or difficult to locate.” The proposal adds that “automatic portability transactions are intended to benefit participants and IRA owners that are unresponsive or missing” by consolidating their retirement assets into their current plan.

Under current rules, service providers offering this transfer service, called auto-portability, could not assess a fee directly to the IRA owner. The provider would either have to provide the service for free, charge the new plan sponsor or simply not provide the service.

This is because when the provider moves assets on behalf of the participant without their affirmative consent, the provider acts on its own discretion, making it a fiduciary, according to the DOL’s former guidelines. In order to charge a fee from retirement assets for fiduciary acts, the provider must have a Prohibited Transaction Exemption from DOL. The proposal would provide a blanket exemption for the noted circumstances.

Direct Fee Now OK

The DOL’s proposal also notes that “a direct fee to be paid by a plan sponsor,” instead of a fee assessed to the IRA owner, would still be permitted.

The new plan would not be required by the proposal to accept the new funds from the IRA if the new plan’s plan documents do not permit such a transfer. However, the ability of the service provider to charge the fee to the IRA owner could make plans more likely to permit it, since it would not cost the plan anything.

The proposal, if passed, would codify Section 120 of the SECURE 2.0 Act of 2022.

SECURE 2.0 provided for the auto-portability measure and required service providers to observe certain requirements. Those requirements were listed in the DOL’s proposal and include, among other requirements:

  • The service provider must accept its status as a fiduciary;
  • It may only assess reasonable fees;
  • It must disclose those fees to other fiduciaries involved in the transfer;
  • It must aim to maintain the participant’s investment selections;
  • It may not use participant data for any purpose apart from executing the rollover; and
  • It must ensure that the participant’s contact information is accurate.

The DOL itself also provided for additional requirements for service providers in the process, including a prohibition on contract language that limits the “automatic portability provider’s liability in the event that the automatic portability transaction results in an improper roll-in to the transfer-in plan.”

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