SECURE 2.0 Expands Roth Options for SEP and SIMPLE Plans

Before SECURE 2.0’s enactment, SEP and SIMPLE IRA plan contributions had to be made as pre-tax contributions, but now employers may allow employees to elect to have contributions into a SEP or SIMPLE IRA made as Roth contributions. Implementing these provisions requires significant retooling for employers, third-party providers, and financial organizations. In December 2023, the Internal Revenue Service (IRS) released Notice 2024-02 which provides insight into how the retirement industry can effectively support the administration of these provisions.

SEP and SIMPLE Roth IRAs may receive designated Roth contributions

Effective for plan years beginning after December 31, 2022, employers may permit individuals to treat elective deferrals, when applicable, and employer matching or nonelective contributions as Roth contributions in either a SEP or SIMPLE Roth IRA. If an employer offers a Roth option, employees must affirmatively elect to have SEP or SIMPLE contributions deposited to a Roth IRA and must also have the opportunity to make that election when they first enter into a salary reduction agreement under the plan. For SEP plans other than a salary reduction SEP (SAR-SEP) plan, the employee must have the “effective opportunity” to elect a contribution to be made to a Roth IRA.

Roth salary deferral contributions are included in the participant’s gross income in the tax year in which the participant would have otherwise received the contribution as compensation. The employer must report these contributions on Form W-2, Wage and Tax Statement. Employer Roth matching and Roth nonelective contributions are includable in the participant’s gross income in the year that the contribution is actually made to the Roth IRA, regardless of whether the contribution is treated as made for the prior tax year. Employers must report these contributions on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.

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(02/2024) - This material is for informational purposes only and is not intended—nor should it be relied on—as legal, tax, accounting, or investment advice. You should consult with your competent legal, tax, accounting, or investment advisors for guidance on your specific issues or questions. This content reflects known information as of the publication date and may not reflect the most up-to-date information on this topic; nor is it represented to be error-free.