26 U.S.C. § 402A — Optional treatment of elective deferrals as Roth contributions

(a) General rule If a retirement plan sets up a qualified Roth contribution program, four things follow. First, any Roth contribution an employee chooses to make counts as a regular elective deferral for tax purposes, except it is not left out of the employee's taxable income — meaning the employee pays tax on it now. Second, if the employer matches an employee's contribution (including matching a qualified student loan payment, under certain rules), and that match is placed in the employee's Roth account, it's treated as a normal matching contribution — but again, it is taxed now instead of later. Third, if the employer makes a Roth-style non-matching contribution on the employee's behalf, that money belongs to the employee right away (it can't be taken back), and it's taxed now. Fourth, a retirement plan does not fail to qualify under the tax rules just because it includes this kind of Roth program. (b) Qualified Roth contribution program A "qualified Roth contribution program" is a program that lets an employee choose to route money — that would otherwise go in as ordinary pre-tax elective deferrals, matching contributions, or non-elective contributions — into Roth contributions instead. To count as this kind of program, the plan must open a separate "designated Roth account" for each employee's Roth contributions and any earnings on them, and must keep separate records for each of those accounts. (c) Definitions and rules for designated Roth contributions A "designated Roth contribution" is money that could legally be excluded from an employee's income without this section, but which the employee chooses — in whatever way the Secretary requires — not to exclude. There's a cap: the amount of elective deferrals an employee can designate as Roth can't be more than the maximum amount the employee could otherwise exclude from income for the year, minus whatever elective deferrals the employee is not treating as Roth. Money can be rolled over from a designated Roth account, but only into another designated Roth account belonging to the same person, or into that person's Roth IRA; such a rollover doesn't count against the Roth designation cap. Separately, some rollovers move money into a designated Roth account from a source that is not itself a Roth account. For those, the amount rolled in generally must be included in the employee's taxable income, and the early-withdrawal 10% penalty under section 72(t) does not apply. For distributions in 2010 rolled into Roth accounts this way, unless the taxpayer opted out, half the taxable amount was included in income in each of 2011 and 2012, and once made, that choice for a given year could not be changed after the tax deadline. This rollover-to-Roth rule applies specifically when a plan with a Roth program rolls a non-Roth distribution into the same plan's designated Roth account. These rollovers also don't count against the earlier designation cap, and several other technical rollover rules from the Roth IRA rules apply here too. A plan may also let an employee move money that isn't otherwise available for withdrawal directly into their designated Roth account within the same plan; this counts as a Roth rollover, and doing this does not violate the usual restrictions on early withdrawals from 401(k), 403(b), 457, or federal Thrift Savings Plan accounts. (d) Distribution rules Money paid out of a designated Roth account is not taxed again if it is a "qualified distribution." A distribution counts as qualified using the same test as Roth IRAs, with one exception from that test not applied here. But a distribution is not qualified if it's paid within five tax years of the employee's first Roth contribution to any Roth account under that plan (or, if money was rolled in from an earlier Roth account under a different plan, five years from the first contribution to that earlier account). Also, distributions of excess deferral amounts or excess contributions, and any earnings on them, are never treated as qualified — they stay taxable. If an excess deferral tied to a Roth contribution isn't paid back by the following April 15, it is not treated as the employee's own investment in the account, and it becomes taxable income in the year it's finally distributed. Tax rules that normally combine all payments from a retirement plan into one calculation are applied separately to the Roth account. Finally, two rules that would otherwise force money out of the account before death — the general required minimum distribution rule and the incidental death benefit rule — do not apply to Roth accounts. (e) Pension-linked emergency savings accounts A retirement plan may include a "pension-linked emergency savings account," a special short-term savings account tied to the retirement plan that is generally treated as a designated Roth account. The plan can offer to enroll eligible employees or can automatically enroll them, but must separately track and record contributions to this account and must allow withdrawals as described below. An "eligible participant" is someone who meets the plan's normal age and service rules and who is not a "highly compensated employee." If someone becomes highly compensated after starting the account, they can't put in more money, but they keep the right to withdraw whatever is already there. Contributions are capped at the lesser of $2,500 or a lower amount the plan sponsor sets; this cap adjusts for inflation each year after 2024, rounded down to the nearest $100. If a contribution would push the account over this cap, and the employee has another Roth account in the same plan, the plan can redirect the extra money there — either the employee chooses this, or, if they don't choose, the plan assumes they want the extra contributions redirected at the same rate. Otherwise, the plan must simply refuse the extra contribution. A plan can automatically enroll eligible employees at a contribution rate of up to 3% of pay, unless the employee opts for a different rate or opts out entirely, after being given reasonable notice. The plan sponsor picks this default rate and can change it only once a year, before the next plan year starts. The plan administrator must send participants a notice 30 to 90 days before their first contribution (or before any change to their default contribution rate), and at least once a year after that. This notice must cover: the purpose of the account (short-term emergency savings); the contribution limits and how contributions are taxed; any fees or restrictions; how to contribute, opt out, change contribution rates, or withdraw money; the amount being contributed or the percentage change; the account balance and how much the participant has contributed; the investment option used for the money; what happens to the balance when employment ends; and, for anyone who becomes highly compensated, their right to withdraw the balance and the fact that they can't contribute more. This notice must be accurate, complete, and written so an average participant can understand it, and it can be combined with certain other required retirement-plan notices. If an employer matches other retirement contributions, it must also match contributions to this emergency savings account, at the same rate, up to the account's contribution cap — but the matching money itself goes into the employee's regular retirement account, not into the emergency savings account. When counting toward any cap on matching contributions, an employee's other (non-emergency-savings) elective deferrals are matched first. Employees can withdraw money from this account, in full or in part, at least once a month, and the plan must pay it out as soon as practical after the employee asks. These withdrawals count as qualified distributions (so they aren't taxed again) and satisfy the usual early-withdrawal restriction rules for 401(k), 403(b), and 457 plans. When an employee's job ends, or the plan sponsor shuts down the emergency savings account feature, the employee can choose to move the balance into another Roth account under the same plan; any amount not moved must be made available to the employee within a reasonable time. Money cannot be moved into this account from any other account under the same employer's plans. A technical Roth-IRA rollover restriction does not apply to this kind of transfer. If an employee has excess deferrals that must be paid back, and some of that money sits in the emergency savings account, that account's money is paid back first, up to what was contributed that year. Generally, withdrawals from this account are not treated as "eligible rollover distributions" (which matters for withholding and other rollover rules) — except that when the account balance is moved into another Roth account at job termination, as described above, it is treated as an eligible rollover distribution for most purposes. A plan can drop this emergency savings account feature at any time without that being treated as an illegal cutback of benefits. Finally, the plan can use reasonable, narrowly targeted procedures to stop people from gaming the matching-contribution rules, but the plan does not have to pause an employee's matching contributions just because that employee withdrew money. The Secretary, working with the Secretary of Labor, must issue guidance about these anti-abuse rules within 12 months of the SECURE 2.0 Act of 2022 being enacted. (f) Other definitions An "applicable retirement plan" is any of three plan types: a tax-exempt employees' trust, a 403(b) annuity plan funded by employer contributions, or an eligible 457(b) deferred compensation plan of certain tax-exempt or government employers. "Elective deferral" means either of two kinds of employee pay deferrals recognized elsewhere in the tax code, or a deferral under one of those same 457(b) plans. "Matching contribution" means either the standard kind of matching contribution recognized elsewhere in the tax code, or a contribution such a 457(b) employer makes on an employee's behalf to match the employee's own deferral — but only if that contribution can never be taken back once made.