The trend in Roth contributions in 401(k) plans

Interest in Roth contributions in 401(k) plans has been increasing over the past decade—and now that focus is intensifying as employers consider Roth-specific provisions in the SECURE 2.0 Act.

90% of employers offered Roth contributions in their 401(k) plan in 2022—nearly double the rate just 10 years earlier.1

Let’s take a look at the benefits of Roth contributions in a 401(k) plan to employees. We’ll also review the SECURE 2.0 Act provisions related to Roth and how they might impact Roth options in employer-sponsored benefits programs.

Benefits to employees

  • Employees make post-tax Roth contributions to a 401(k) account through payroll deductions.
  • The tax employees pay today could be lower than the tax rate in the future.
  • Earnings have the potential to grow tax-free.
  • Qualified distributions are tax-free.

SECURE 2.0 Act Roth-related provisions

Policymakers are taking more notice of Roth as well. The SECURE 2.0 Act requires catch-up contributions for employees age 50 or older with more than $145,000 in wages to be made on a Roth basis. Therefore, employers who currently do not have a Roth provision and want to continue to offer catch-up contributions will need to consider adding a Roth provision. Employers have until January 1, 2026 to address this provision in their plan. Another provision in the Act allows employers to provide employees with the choice to designate employer matching or nonelective contributions as Roth. This is an optional provision that gives employees the ability to diversify their tax obligation.

There are a few things you should know:

  • The IRS confirms that if you offer employees the option to have their employer contribution taken on a Roth basis, there’s no requirement to withhold for wages. It’s not subject to FICA taxes, with one exception for certain types of government plans.
  • The guidance confirms that if an employee decides to designate employer contributions as Roth, they will be reported on the 1099-R, not the W-2 that you issue an employee.
  • Additionally, employees may only designate employer contributions as Roth if the contributions are fully vested immediately. For example, if you have a three-year vesting schedule, an employee must wait three years before they can take advantage of the provision.

There are still many questions about how employer-designated Roth contributions are going to work and the responsibilities of the payroll provider and recordkeeper. We will keep you updated as more guidance is issued.

Plan Sponsor Council of America, 2022.