Can Employer Contributions to a 457(b) Plan be Designated Roth?

Q: I understand that, under Section 604 of the SECURE 2.0 Act of 2022, employer contributions to a 403(b), 401(a) or governmental 457(b) plan can be designated by participants as Roth contributions. I’m a little confused as to how this would work for a governmental plan. I thought both employer and employee contributions to a 457(b) are considered elective deferrals for tax purposes, so that such deferrals could have already been designated as Roth contributions, provided that the plan allowed for Roth. Am I wrong?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: You are confused, but to be fair to you, these rules are quite confusing! Special rules for 457(b) plans provide that both employer contributions and employee elective deferrals to a 457(b) plan are considered to be elective deferrals for FICA purposes, but not for purposes of income taxation.

However, this distinction does not dictate the types of contributions that may be designated as Roth contributions. Prior to SECURE 2.0, only employee deferrals that the employee elected to make (or were deemed to make under an automatic contribution arrangement) were eligible to be designated as Roth contributions. The Internal Revenue Code did not permit an employee to designate employer matching or nonelective contributions as Roth contributions, notwithstanding the treatment as deferrals for limited purposes under 457(b) plans. Thus, while deferrals could have been designated as Roth contributions, in order for a participant to designate employer contributions as Roth contributions to a governmental 457(b) plan as Roth contributions, Section 604 of SECURE 2.0 was necessary.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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