About half of all employees in the U.S. are not confident in having enough resources in retirement, according to a survey last year. Yet millions of workers do not participate in employer’s retirement plans and aren’t necessarily saving on their own. Do you want to offer a retirement savings option to employees—to help them save as well as to retain good employees—but don’t have the funds to make any or only small contributions on their behalf? There are still arrangements you can offer that help employees save for their retirement.
Payroll Deduction IRAs
With this arrangement, employees set up traditional or Roth IRAs with a financial institution and authorize the employer to withhold an amount from compensation that is then transferred directly to the account. The usual IRA contribution limits apply. A Payroll Deduction IRA program can be used by any employer—corporation, partnership, limited liability company, or sole proprietor—of any size. The employer’s only expense is the administrative cost of arranging the withholding and funds transfer.
There is no annual filing or reporting requirements for the employer. The only condition: it must be offered to employees on a nondiscriminatory basis. The employer can end the program at any time for any reason, such as being in a position to start a qualified retirement plan entailing employer contributions. Just notify employees that the Payroll Deduction IRA program is being discontinued. The IRS has more details about Payroll Deduction IRAs.
These are savings programs that can be thought of as mini-Roth IRAs, except that employees do not have to make any investment decisions; funds automatically earn a set return. myRAs are funded solely by withholding funds from employees’ paycheck. The funds are transferred to the U.S. Treasury, which administers the savings program. myRAs went nationwide at the end of 2015, but it’s been reported that only about 20,000 accounts have been opened since then.
Like Payroll Deduction IRAs, there is no cost to employers; there is no annual reporting. The Treasury has information for employers about offering myRAs.
If you’re in a position to make modest contributions for employees’ retirement savings, consider a SIMPLE IRA (Savings Incentive Match PLan for Employees). Generally limited to employers with 100 or fewer employees (whether or not incorporated), employer contributions are capped at either:
- Matching contribution up to 3% of compensation, or
- 2% nonelective contribution for each eligible employee. Under the nonelective contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, you must still contribute to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual compensation limit ($270,000 in 2017).
Employees who choose to make contributions are limited in 2017 to $12,500 (plus an additional $3,000 if age 50 or older by the end of the year). Here’s how the employer contribution options work:
- Matching contributions: If an employee age 53 contributes $4,000 and has a salary of $65,000, the employer’s contribution would be $1,950 (3% of $65,000). If the employee only contributed $1,500, then the employer’s contribution would be limited to this amount. If the employee did not make any contributions, then no employer contributions would be required.
- Nonelective contributions: Whether or not the employee makes any contributions, the employer must contribute $1,300 (2% of $65,000).
The IRS has more information about SIMPLE IRAs.
Impact of mandatory state plans
Some states, including California, Connecticut, Illinois, Maryland, and Oregon, have passed laws mandating that private-sector employers without their own qualified retirement plan use payroll withholding to enable employees to participate in state-sponsored or coordinated retirement plans. These plans are referred to as Secure Choice.
Last summer the Department of Labor issued final regulations for these automatic enrollment programs so these programs are poised to launch. The regulations make it clear that like other payroll deduction programs in which an employer’s role is no more than ministerial, these state plans are not treated as ERISA plans (i.e., subject to all the rules for qualified retirement plans). An employer that already has a Payroll Deduction IRA or SIMPLE IRA plan would be exempt from the requirements of Secure Choice; there is no mention of myRAs in the law.
Small employees with little or no money for retirement plan contributions can still help employees save for their retirement. Work with your CPA to find the best fit for your business.