February 21, 2019

Church Treasurer Tips: Processing 403(b) Roth Type Employee Contributions

By Aaron Mitchell, Alliance Benefits

We here at Alliance Benefits are proud to be able to offer an excellent retirement 403(b)(9) church plan that helps take care of our pastors and staff with their retirement needs. One nice option the Alliance 403(b) plan offers is Roth employee contributions. If that option is chosen however, be sure to know how to process Roth contributions properly in your church’s payroll and tax documents.

Before getting into our processing tips, let’s define the two types of contributions available to our 403(b) participants.

  • Before Tax (Traditional) contributions are tax-deferred. These contributions are not taxable income for the current year but will be taxable income when withdrawn in retirement including any investment earnings.
  • Roth contributions are taxable income for the current year but could be withdrawn tax-free at retirement including any investment earnings, if the withdrawal is made at least 5 years after the first Roth contribution.

Roth contributions can be tricky to process since there are some important differences when compared to traditional contribution processing. It’s important that you are always aware of how contributions are being withheld from paychecks.

  • If a participant has elected Before Tax contributions, you must not withhold federal taxes on those contributions since they are tax-deferred.
  • If a participant has elected Roth contributions, you must withhold federal taxes on those contributions since they are taxable income for the current year.
  • If your church does not withhold any federal income taxes for your pastor and he pays his own quarterly taxes, please be sure he considers any Roth employee contributions as part of his current taxable income for that year.

It’s also important to be aware of how participant W-2s are processed for contributions.

  •  If a participant has elected Before Tax contributions, you must exclude the total annual employee contributions from Box 1 that displays taxable income. You must also enter the total annual employee contribution amount in Box 12 using code E for Before Tax.
  • If a participant has elected Roth contributions, you must include the total annual employee contributions in Box 1 that displays taxable income. You must also enter the total annual contribution amount in Box 12 using code BB for Roth.

Finally, one thing that is consistent between both contribution types is how the employee contribution dollar amount percentage is calculated. You should come up with the same number regardless of which contribution type is chosen. That is because both contribution types are always calculated on the same gross pay amount. You never want to first withhold the tax, then calculate contribution percentage on the remaining pay amount, even when a Roth contribution type is chosen.

Please remember if your Alliance 403(b) participants would like professional advice on which contribution type is best for them, they are always welcome to contact our plan consultants, Strategic Financial Partners, at phone number 866-963-1843. If you leave a message, calls are generally returned within 2 business days and all advice is free of charge.

 

Aaron joined Alliance Benefits in September 2017. As a Benefits Consultant, he works on building relationships with churches and districts, and assists with health insurance and retirement 403(b) questions. He is assigned to serve the churches and districts in the Midwestern and Northeastern United States. 


Posted in: 403(b) Plan Tools