Roth 401k Company Match Tax Impact
I’ve read your post regarding the Roth 401k here: IRS Issues Helpful Guidance on Roth 401(k) Employer Contributions
I’ve come across conflicting information regarding the tax impact of a Roth 401(k) employer match, specifically whether the match is treated as pre-tax or post-tax. I’d appreciate some clarification on the following
- Tax Impact on Employees – If the employer company match goes into a Roth 401k, does this mean employees are not taxed on the match when it’s contributed but will be taxed as ordinary income upon withdrawal (ie. The Roth 401k is commingling pre-tax and post-tax dollars)? Or is there any scenario where the match could be treated as post-tax and if so, how is the employee taxed?
- Reporting Requirements – How should the employer Roth 401k match be reported for tax purposes? Does it appear on the employee’s W-2, or is it only reported on 1099-R, using code “G” in Box 7? What does on 1099-R, using code “G” in Box 7 represent in layman terms?
- Withdrawal Considerations – When an employee takes distributions from their Roth 401(k), how are the employer match and its earnings handled from a tax perspective if the answer above is that the not matter what the employer company Roth 401k match is pre-tax?
I appreciate any guidance & clarity you can provide on this.
Permalink Submitted by Alan - IRA critic on Mon, 2025-02-24 18:43
A Roth matching contribution will be taxable to the employee in the year the contribution is made.
A 1099R coded G will be issued, so this will have the same tax impact as if the employee did a taxable in plan Roth rollover. The Roth matching contribution will actually be deposited into the Roth 401k account however, the 1099R is just a way to collect the taxes for it and that 1099R will be no different than if the employee did a taxable in plan Roth rollover.
It’s not totally clear yet how the plan would report a Roth 401k distribution which includes vested Roth matching contributions. Since the employee has already paid taxes on this match, I think it will be treated as employee contribution basis, the same as an in plan Roth rollover would be treated.
Permalink Submitted by Erin Anderson on Tue, 2025-02-25 14:44
Alan,
I appreciate your analysis, as it suggests a “backdoor Roth” approach to funding company matches which the goal of many small business owners. However, if SECURE 2.0 allows companies to contribute their company match to a Roth 401(k), why does the IRS website state the opposite?
The link below specifies that matching and profit-sharing contributions cannot be made directly to a designated Roth account. While an employer may use designated Roth deferrals to calculate a matching contribution, the match itself must be deposited into a different account within the plan:
IRS Website – Designated Roth Accounts
Thank you for your insights!
Permalink Submitted by Erin Anderson on Tue, 2025-02-25 14:50
Alan,
The IRS also states your previous position here: https://www.irs.gov/newsroom/secure-2-point-0-act-changes-affect-how-businesses-complete-forms-w-2
Designated Roth nonelective contributions and designated Roth matching contributions
Under section 604 of the SECURE 2.0 Act, plans can allow employees to designate certain matching and nonelective contributions made after Dec. 29, 2022, as Roth contributions. These contributions are not subject to withholding for federal income tax, Social Security or Medicare tax. For more information, refer to Questions and Answers L-1 through L-11 in Notice 2024-2, published in the Internal Revenue Bulletin.
Unlike regular Roth contributions, designated Roth nonelective 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.
So its seems the IRS itself is offering conflicting information which is exacerbating the confusion and the fact that no payroll services I have found will allow a company match to Roth 401k.
Permalink Submitted by Alan - IRA critic on Tue, 2025-02-25 15:32
Yes, the updates trickle out piecemeal.
The IRS has updated the tax code to reflect Notice 2024-2 but have not yet updated the Regs and IRS web pages. The Notice itself states that the IRS intends to issue further guidance including Regulations as appropriate. A year has passed and this process remains incomplete.
Unfortunately, Congress will pass legislation like the Secure Acts, giving the IRS little lead time to interpret the legislation, solicit taxpayer and plan administrator input and publish Regs in a systematic and orderly procedure which could result in a smooth implementation. That obviously is not happening, and little progress is being made. And now there are potential plans for Secure 3.0…..