The Secure 2.0 Act allows for features in employer retirement plans to encourage their use. The changes are designed to encourage employees to contribute to 401(k) or 403(b) plans, allowing you to offer small financial incentives to employees.
If employers use a little financial motivation, it’s considered part of employees’ income and is subject to regular tax withholding unless exempted. Let’s look under the hood:
- Salary reduction contributions to a Roth SEP or Roth Simple IRA plan are subject to federal income tax withholding, as well as to FICA and FUTA taxes. These contributions should be included in boxes 1, 3 and 5 of Form W-2, as well as reported in box 12 with code F for a SEP and code S for a Simple IRA.
- Employer-matching and nonelective contributions to a Roth SEP or Roth Simple
IRA are not subject to withholding for federal income tax, FICA or FUTA taxes. These contributions must be reported on Form 1099-R in the year the contributions are made. List total amounts in boxes 1 and 2a of Form 1099-R with code 2 or 7 in box 7, and check the IRA/SEP/Simple checkbox.
The matching details
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 and not subject to withholding for federal income, Social Security or Medicare tax. But designated Roth nonelective contributions are treated as matching contributions as if the plan is a qualified plan and the contributions are made to a governmental section 457(b). Refer to Q&A L-7 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 in the year they’re allocated to accounts and reported in boxes 1 and 2a of Form 1099-R, as well as code G used in box 7. Refer to the Q&A L-1 through L-11 in that same Notice 2024-2.
The reporting requirements that apply to contributions made to a Roth IRA under a SEP arrangement or Simple IRA plan or to a designated Roth account via an applicable retirement plan depend on the type of contribution made. Refer to the 2024 General Instructions for Forms W-2 and W-3, as well as 2024 instructions for Forms 1099-R and 5498.
Know the copies
You can complete and print various copies — but not Copy A — of Forms W-2, W-2AS, W-2GU and W-2VI on IRS.gov for recipients. Any information entered on one copy — but not Copy A — will automatically appear on the others. So what about Copy A? It cannot be completed online to print and file with the Social Security Administration.
If you filed 2023 Form W-2 without following these new guidelines, you may need to file Form W-2C to correct any errors. Refer to the General Instructions for Forms W-2 and W-3 for details on when and how to file Form W-2C.
As you can see, this can get complicated. We’re always here to help make sure you take full advantage of any changes — and remain in compliance.
