The IRS released miscellaneous changes under the SECURE 2.0 Act of 2022 on December 20, 2023. The purpose of the notice is to provide guidance on key rules found in SECURE 2.0 and further updates are anticipated in the future.
The Treatment of Employer Contributions as Roth 401k Including Roth Solo 401k Designated Contributions
Resulting from SECURE 2.0, employer 401k including employer solo 401k contributions can be treated as Roth contributions. One important change found in the Notice 2024-2 section 604 applies to treatment of employer profit sharing (aka nonelective) 401k including solo 401k contributions as Roth contributions.
As outlined in Q. L2 of the notice (page 71): Designated Roth employer contributions made after December 29, 2022 must be included in an employee’s gross income in the year they are deposited into the 401k including the Solo 401k account, even if they relate to a different year. The contributions are also required to be irrevocable, meaning once made to the solo 401k they cannot be reversed.
As outlined in Q. L-6 of the notice (page 74): However, these contributions are excluded from federal income, FICA, and FUTA tax withholdings where the business sponsoring the solo 401k is an S-corporation, C-corporation or an LLC taxed as an S-corporation.
As outlined in Q. L-9 of the notice (page 76 & 77):For reporting purposes, a Form 1099-R for designated Roth 401k including Roth solo 401k contributions must be issued rather than a Form W-2, similar to the tax form required for in-plan Roth conversions. The total employer Roth solo 401k contribution is reported in boxes 1 and 2a of Form 1099-R, using code “G” in box 7.
Example 1: Contribution Made for Prior Year
Jim is self-employed under an S-corporation and opens a solo 401k by 12/31/2023. The S-corp then makes an employer Roth solo 401k contribution for tax year 2023 on February 15, 2024 well before the normal March 15, 2024 contribution deadline as well as before the extended September 16, 2024 extended contribution deadline. Jim’s taxaxable W-2 income for 2023 will be reduced; however, a Form 1099-R will need to be issued for 2024 to report the contribution amount as a taxable conversion, so as to having been converted from the pretax solo 401k to the Roth solo 401k.
Example 2: Contribution Made for Current Year:
Sandy is self-employed under an S-corporation and opens a solo 401k in 2024. The S-corp then makes an employer Roth solo 401k contribution for tax year 2024 on November 22, 2024 well before the normal March 15, 2025 contribution deadline as well as before the extended September 15, 2025 extended contribution deadline. A Form 1099-R will need to be issued for tax year 2024 to report the employer Roth solo 401k contribution amount as a taxable conversion, so as to having been converted from the pretax solo 401k to the Roth solo 401k in 2024.
