Solo 401K ER match to ROTH

[ea_rva aka acctgtaxmatters]

Hello, my client has an SCorp with solo 401k that has traditional and Roth IRAs. She took the max based on her age & salary - $30k pre-tax EE contribution and $30k ER contribution.

1) If EE $30k went to the traditional 401k can the ER $30k portion be placed in the ROTH?

2) If yes, would the ROTH ER contribution be deductible to the SCorp?

Thanks in advance for your help!

[sjrcpa]

There are new rules for Employer ROTH contributions to a 401(k) for 2023. Some were supposed to be mandatory but  have been postponed.

If the Employer ROTH contribution is allowed, it is wages to the S Corp shareholder (in the year pd I think?)

Have you or client checked with the Plan Administrator?

[ea_rva aka acctgtaxmatters]

Funny you ask...the Plan Admin is her brother. He takes draws from her business checking each month for contributions and the bookkeeper adjusts payroll so we struggle with the transparency. 

He informed me today:

"$60k went to solo 401k, EE put in $30k Roth and ER put $30k into traditional"

This is after her EE was processed as pre-tax contributions.

So was wondering how the ER contribution should be handled.

[ea_rva aka acctgtaxmatters]

Found more info from internal revenue bulletin:

https://www.irs.gov/irb/2024-02_IRB

Designated Roth matching and nonelective contributions are includable in an employee’s income when made. However, SECURE 2.0 doesn’t specify how or when to report these amounts for income tax purposes (e.g., as Form W-2 wages or instead on Form 1099-R). The law also doesn’t say whether these amounts are subject to Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) or federal income taxes. Notice 2024-2 provides clarification on these issues.

• Includable in the year of allocation. The notice confirms that designated Roth matching and nonelective contributions are includable in an employee’s income in the year the contributions are allocated to the employee’s plan account. This treatment applies even if the contributions are deemed made on the last day of the employer’s prior tax year for the employer’s tax purposes.
• Reportable on Form 1099-R. Designated Roth matching and nonelective contributions are reportable on Form 1099-R. IRS instructs filers to report the aggregate amount of such contributions made to a participant during the year in boxes 1 and 2a and use code G in box 7.
• No federal tax withholding. Designated Roth matching and nonelective contributions are excluded from wages for federal income tax withholding purposes. However, IRS indicates that employees electing Roth treatment may need to adjust their tax withholding elections or make estimated tax payments to account for the tax due on these amounts. Sponsors may want to communicate this point to eligible employees.
• FICA and FUTA treatment. Like matching and nonelective contributions made on a pretax basis, designated Roth matching and nonelective contributions under qualified and 403(b) plans aren’t wages for FICA or FUTA purposes. Designated Roth matching and nonelective contributions made to an eligible governmental plan aren’t wages for FUTA purposes but sometimes may be FICA wages.

[qbteachmt]

This reads a bit confusingly.  Some of this seems backwards and/or wrong. Let's review a few things:

"1) If EE $30k went to the traditional 401k can the ER $30k portion be placed in the ROTH?"

A 401(k) plan can include Roth 401(k). Not Roth IRA. The employer establishes the plan and how the match will be applied. You stated:

"and Roth IRAs."

401(k) employment retirement plan funds don't go into IRA accounts (that would fall under a SIMPLE IRA plan or SEP/IRA). You don't put $30k or $60k into your Roth IRA as contribution. You can do conversion/rollover from employer plan to personal IRA, if the plan has this provision.

"This is after her EE was processed as pre-tax contributions."

As Roth? For anything Roth, it is post-tax. That's the point. So, it's not really processed. It seems it was treated the same as Roth IRA?

"So was wondering how the ER contribution should be handled."

Either taxed, if going to Roth, or pre-taxed, if going to 401(k) (which is tax deferred until distribution). Roth means not taxable when distributions are taken, if all conditions are met.

From: https://www.ebglaw.com/insights/publications/secure-act-2-0-what-401k-plan-sponsors-need-to-know

"Historically, all employer contributions to 401(k) plans have been pre-tax contributions, with participants not taxed on such contributions and related earnings until distribution. Under SECURE Act 2.0, employers may permit employees to elect that employer matching and non-elective contributions be made as Roth contributions. Roth employer contributions are taxable to the employee at the time they are made, and such contributions and their related earnings are not taxed upon distribution. Participants must be 100 percent vested in employer Roth contributions at the time they are contributed to the plan."

Is her brother a professional or an "investment advisor" or just trying to be helpful? Who is allowing him to take "draws" (which an S Corp doesn't even provide for)?

[ea_rva aka acctgtaxmatters]

I am using the wrong terminology - it's a 401k with Roth and Traditional options.

He is an investment advisor and I don't support how they are funding the plan and made that clear. They are old LLC to new SCorp, still behaving as an LLC and won't budge from that.

I only learned of the ROTH contribution component yesterday. It could be that he was hoping it would slip through the cracks. I was under the impression that all was funded to Traditional. We are now looking at a W2 to correct and a 1099R that needs to be issued.

More than likely I will drop her as a client after this tax season.

Thanks for the input!