The Secure 2.0 Act significantly changed the retirement planning landscape, creating new options and new complications.

One often-overlooked modification involves a rule that allows employees to elect to have their employer matching contributions treated as Roth contributions. This effectively replaces the traditional pre-tax contribution with an after-tax contribution that will generate tax-free income during retirement.

While this offers employees a valuable new option, it can also generate confusion. The Roth contribution election will trigger reporting and tax obligations — and employees who made the election may be receiving Forms 1099-R for the first time.

As such, it's important to evaluate any possible tax issues associated with the employer matching choice.

Roth Employer Matching: The Basics

Before the Secure 2.0 Act, employer matching contributions to retirement plans were made as traditional pre-tax contributions. Beginning in 2023, employees were able to elect employer matching or non-elective contributions to be made on a Roth basis, if the plan offered a Roth option.

This can be valuable for employees, who otherwise would be required to execute an in-plan Roth conversion to fund a Roth account. This strategy generates tax liability on earnings accumulated on the employer contribution between the time of contribution and the time of conversion.

1099-R Reporting and Employer Matching Contributions

Employees typically do not receive a Form 1099-R when they contribute to a retirement account. These forms are issued when the individual takes a distribution from the account. Many, then, may not expect to receive a Form 1099-R based on their employer matching contribution.

That changed with Secure 2.0 Act, applying to employer matching contributions to Roth 401(k)s, Roth 403(b)s, Roth SEP-IRAs and Roth SIMPLE IRAs.

The Internal Revenue Service treats Roth employer matches as though they were in-plan rollovers, converting traditional funds to a Roth account. And the IRS continues to treat employer matching contributions to SEP IRAs and SIMPLE IRAs as though the funds were contributed to the individual retirement account and immediately converted to the Roth in a taxable transaction.

This generates the Form 1099-R reporting obligation, with the reporting depending on the taxpayer's situation. Box 1 will reflect the entire amount of the contribution, and Box 2a reflects the taxable amount. This will be the same as the gross distribution in Box 1 because all of a Roth contribution is taxable.

Box 7 is the distribution code. Code G is used to reflect a direct in-plan rollover from a qualified plan to a Roth. For IRAs, the Box 7 code will depend on the taxpayer's age — Code 2 if the individual is younger than 59.5 and Code 7 if the owner is at least 59.5, so that an early distribution penalty does not apply.

Tax Consequences of the Roth Election

Form 1099-R will be issued for the year that the employer matching contribution is actually deposited into the account. Because employers have until their tax filing deadline to deposit the funds, the 1099-R may be issued for the year after the year to which the contribution relates.

Since Roth contributions are taxable to employees regardless of whether made by the employee or employer, employees need to evaluate their current tax situation when deciding whether to make the Roth election. It may be more valuable to have the employer contribution treated as a Roth contribution during a year in which the taxpayer expects to be in a relatively low tax bracket.

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