Is Adding An Employer-Sponsored IRA to Your Benefits Mix Optimal? Four Things to Consider

While the IRS calls an IRA “essentially a “no fuss, no muss” situation,” many, if not most, employees get confused when it comes to different kinds of IRAs. While some know that there are different types, they may get confused as to which they can access.

Usually, employer-sponsored IRAs are only provided by employers who can’t offer 401(k) plans but want to help employees save for retirement. But the list of who offers employer-sponsored IRAs is growing, and for good reason. A quick look at how Americans used their stimulus checks during the pandemic l shows that a large percentage invested the cash, even those who already had established retirement accounts. Plan sponsors may want to consider adding employer sponsored IRA funds into the mix of the benefits offered to their employers. For those who do, here are a four things to consider about employer sponsored IRAs.

Z marks the spot, with a close follow by X. The highest numbers of those who reported using stimulus checks to invest in stocks were those in the 25-34 year old range, not necessarily those in older ranges who may have wanted to benefit from IRS rules regarding so called “catch-up” investments. It’s worth noting that the GenZ investors invested more of the stimulus check than other generations, but GenX still reported using 37% of the stimulus money on stock market investments.[1] In other words, while the additional investment option might be most attractive to GenZ employees, it still may be attractive to a large percentage of your GenX workforce. It’s also worth noting that a significant percentage of those receiving stimulus checks invested in bitcoin or other alternative investments. According to USA Today “10% of the stimulus payments, or nearly $40 billion of the $380 billion in direct checks, may be used to buy bitcoins and stocks, according to [a survey of] … 235 individuals with less than $150,000 in household income.”[2] Employees may be seeking options for investing in addition to the traditional 401(k) option. For plan sponsors who are facing labor shortages or tougher than usual recruiting seasons, adding an alternative investment option, in addition to the 401(k) may be beneficial.

What’s in a Name? While the IRS calls an IRA “essentially a “no fuss, no muss” situation,”[3] many, if not most, employees get very confused when it comes to different kinds of IRAs. While some know that there are different types, they may get confused as to which they can access. First, employees may want to understand the difference between an individual IRA and an employer-sponsored one, such as a SIMPLE IRA. Additionally, employees many need help distinguishing between a traditional and Roth IRA and determining to which they are eligible.

Not so SIMPLE. Some plan sponsors may think the only employer-sponsored IRA available is a SIMPLE one or a SEP, but that isn’t accurate. While SIMPLE IRAs are available to employers with small workforces (usually less than 100), employers with large workforces can also offer employer-sponsored IRAs other than SIMPLE. Employer-sponsored IRAs can be either traditional or Roth and they often have a great deal of flexibility as to the details of who can be enrolled and who can receive employer contributions.

Payroll versus Sponsored. While employees may be confused as to which IRA they wish to add, employers must without question consult their advisors before offering any IRA through payroll. That is because a payroll deduction IRA is treated very differently than an Employer Sponsored IRA. While a plan sponsor may want to offer an employer sponsored IRA after speaking with their advisors, they should be careful in setting one up. A simple passthrough on a paycheck of employee wages to an IRA fund, without any indication of employer endorsement or payment of administrative fees, will not trigger ERISA regulations.  In contrast, according to the IRS, “Any amount contributed by an employer to an IRA that is employer sponsored under IRC Sec. 408(c) shall be treated as payment of compensation to the employee (other than for a self-employed individual), deductible by the employer and subject to Social Security and unemployment taxes.”[4] It’s also worth noting that any contribution by an employer to an employee’s IRA will count towards that employee’s IRA contribution limit. That means employees must be able to track contribution amounts so as to not run afoul of IRS rules.





These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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