SECURE 2.0:  Considerations in Offering After-tax Employer Contributions

One optional provision in SECURE 2.0 allows employees to have employer matching and non-elective contributions made as after-tax Roth savings. You may have employees asking about this provision, but there are several things to consider before adding this to your plan.

First, like many optional provisions, you should review the administrative changes required for you and your recordkeeper to track the after-tax savings accurately. Your payroll file will need an additional employer Roth savings field, and you will need to confirm with your recordkeeper that their systems have been updated to accept and track these contributions.

Second, it is important to understand the tax reporting of these contributions. When SECURE 2.0 was passed, it was unclear how the contributions would be reported to the IRS, with some thinking the employer would report the income on the employee’s W-2. The IRS recently clarified the tax reporting in Fact Sheet 2024-18, which states that “these contributions are not subject to withholding for federal income tax, Social Security or Medicare tax.” Instead, the contributions must be reported on Form 1099-R. Reporting the income on the 1099-R moves the reporting function from the employer to the recordkeeper, which may make it easier to adopt.

The third and perhaps most important consideration is your employees understanding how tax reporting works. The employee will receive a 1099-R in January, reporting all the after-tax contributions for the previous year as income. If the employee is not aware that the employer has not taken out taxes, they may face a higher tax burden when they file their tax return. An employee earning $60,000 receiving a 5% employer match will report an additional $3,000 in earnings. If they have not adjusted their W-2 withholdings, they might not be prepared to pay the additional tax. Employers may want to notify employees electing to use this provision that they might consider adjusting the withholding on their W-2. If the underpayment is significant, the employee may even be penalized and required to make estimated payments.

For investors wanting to save on a Roth basis, this provision provides a great opportunity to have additional funds available for tax-free withdrawal at retirement. However, employers should review these three items before adding this provision to their plans.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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