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January 2024

Finally the IRS Issues Needed Guidance on SECURE Act 2.0 Changes for Roth SEP-IRAs

On December 20, 2023 the IRS finally issued guidance in Notice 2024-02 regarding various law changes in the SECURE Act 2.0 impacting Roth SEP-IRA plans. These changes are effective for the 2023 tax year. The section authorizing these changes is section 601. These changes could be implemented in 2024 for the 2023 tax year.

The IRS does not discuss Roth SEP-IRA plans for one person plans. We are not aware of any law which prohibits a one person business from having Roth SEP-IRA plan. The maximum per person SEP-IRA contribution for 2023 is $66,000 and it is $68,000 for 2024. We expect many successful small business owners will switch from making traditional SEP-IRA contributions to making Roth SEP-IRA contributions. Such contributions will need to be segregated.

The IRS clarifies that an employer which sponsors a SEP-IRA plan is not required to amend its plan to offer its eligible employees the right to designate the employer contribution as being a Roth SEP-IRA contribution. An employer has the right to write the plan to require that all contributions be traditional SEP-IRA contributions Congress hopefully will confirm that the IRS position is what Congress intended.

If an employer amends its respective plan to allow its employees the right to elect to have the employer contribution be a “Roth” contribution, then an employee must have the right to decide if the employer contribution will be a Roth SEP-IRA contribution, a standard contribution or both.

An employer can make a Roth contribution on behalf of an employee only if the employee has previously made his or her election or instruction that some or all of the employer’s SEP-IRA contribution is to be designated as a Roth SEP-IRA contribution.
An employer must provide an employee a reasonable amount of notice and time to make his or her decision and furnish his or her instruction.

The IRS does not require that there be a second Roth SEP-IRA, plan agreement. The law and the IRS require that a separate account is established for all SEP Roth IRA contributions and related earnings or losses. In many cases there will be improved administration capabilities if a separate Roth SEP-IRA is established.

Once a person makes his or her election or instructions that his or her contribution will be Roth or non-Roth the contribution type cannot be later changed. It is irrevocable.
On a prospective basis an employer is permitted to allow an employee to change their instruction.

An employee who elects to make a Roth SEP-IRA contribution is required to include such contribution in taxable income for the year the employer makes the contribution.

An employee who elects to have the employer contribution be a Roth SEP-IRA contribution should understand that the IRS’ position is these contributions are subject to withholding and FICA and FUTA. Therefore, an employer has the duty for each employee to report these Roth SEP-IRA contributions in boxes 1, 3 and 5 of Form W-2.

We at CWF will be revising our SEP-IRA forms to reflect these new laws.

The IRS in Notice 2024-02 states in Q/A K-7 that an employer may institute a Roth SEP-IRA plan even though the IRS has not yet modified or updated IRS Form 5305-SEP or the rules for a SEP prototype. The current Form 5305-SEP or a SEP prototype my continue to be used until the IRS issues new forms or provides new guidance.

The IRS has given no indication that Form 5498 will be revised so that the IRS will be informed what portion of the employer SEP contribution was a regular contribution and what portion was a Roth SEP-IRA contribution. The individual will need to explain things correctly on their income tax return.

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