IRS issues guidance for employers that adopt key SECURE 2.0 provisions
The IRS's new fact sheet includes guidance for provisions on de minimis financial incentives, Roth SIMPLE and SEP IRAs and designated Roth matching contributions – and how these provisions impact how certain amounts are reported on their W-2s.
Responding to a request for guidance from employers on some key SECURE 2.0 provisions, the IRS has released much-need guidance: An IRS fact sheet informing employers that adopting certain plan provisions will impact how certain amounts are reported on their W-2s.
In May, the ERISA Industry Committee (ERIC) sent a letter to the IRS seeking clarity, on behalf of their employer members, on implementing the de minimis financial incentive provision in SECURE 2.0, which is now covered in the just-released IRS fact sheet.
The new IRS fact sheet also includes guidance on Roth Savings Incentive Match Plan for Employees (SIMPLE) and Roth Simplified Employee Pension (SEP) Individual Retirement Arrangements (IRAs) and optional treatment of employer nonelective or matching contributions as Roth contributions.
De minimis financial incentives
SECURE 2.0 made changes designed to encourage employees to contribute to their employers’ 401(k) plans. These changes allow employers to offer small financial incentives to employees who choose to participate in these retirement savings arrangements. If an employer offers such an incentive, it’s considered part of the employee’s income and is subject to regular tax withholding unless there’s a specific exemption, according to the IRS.
Roth SIMPLE and Roth SEP IRAs
Under SECURE 2.0, new Roth SIMPLE and Roth SEP IRA provisions were designed to help small businesses offer retirement savings programs to their employees, while continuing to make it easier for all Americans to save for retirement. An employer that maintains a SEP or SIMPLE IRA plan can offer participating employees the option to designate a Roth IRA as the IRA to which contributions under the arrangement or plan are made.
Salary reduction contributions to a Roth SEP or Roth SIMPLE IRA are subject to federal income tax withholding, the Federal Insurance Contributions Act (FICA) taxes and the Federal Unemployment Tax Act taxes, according to the IRS. These contributions should be included in boxes 1, 3 and 5 (or box 14 for railroad retirement taxes) of Form W-2. They’ll also be reported in box 12 with code F (for a SEP) or code S (for a SIMPLE IRA).
Employer matching and non-elective contributions to a Roth SEP or Roth SIMPLE IRA are not subject to withholding for federal income tax, FICA taxes or FUTA taxes. These contributions must be reported on Form 1099-R for the year in which the contributions are made to the employee’s Roth IRA. The total amounts are listed in boxes 1 and 2a of Form 1099-R with code 2 or 7 in box 7, and the IRA/SEP/SIMPLE checkbox is checked.
Designated Roth non-elective contributions and designated Roth matching contributions
Under SECURE 2.0, plans can allow employees to designate certain matching and non-elective contributions made after Dec. 29, 2022, as Roth contributions. These contributions are not subject to withholding for federal income tax. In addition, these contributions generally are not subject to withholding for Social Security or Medicare tax.
Related: Employers need help implementing SECURE 2.0: Advocacy group asks IRS for guidance
Unlike regular Roth contributions, designated Roth non-elective and matching contributions must be reported on Form 1099-R for the year in which they’re allocated to an individual’s account. They’re reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7.
The IRS has issued previous guidance and proposed regulations on other SECURE 2.0 provisions:
- In August, the IRS issued much-needed guidance a provision regarding matching 401(k) student loan contributions, which confirms that employers must make matching contributions to student loan repayments under the same manner as the plan’s regular match.
- In July, the IRS and the Department of the Treasury issued final regulations updating the required minimum distribution rules, since the passage of SECURE 2.0. A public hearing to review the proposed changes is scheduled for September 25.
- Also in July, the IRS and the Treasury issued guidance on 401(k) emergency distributions, allowing employees to withdraw $1,000 from their retirement account for medical care.