An Automatic IRA (Auto IRA) is an employment-based individual retirement account (IRA) where workers use payroll deductions to save some of their own money for retirement.

It does not have the employer-sponsorship requirements of 401(k) or other types of pension plans. In other words, it is not an employer sponsored retirement plan. It is an IRA vehicle designed to make it easier for employees to build their own nest egg. Auto IRAs do not require employer contributions. In fact, they are explicitly prohibited.

Automatic IRAs are for employers that do not currently offer a retirement plan, have more than 10 employees, and have been in business for at least two years. These exemptions are designed to minimize the number of affected businesses that run a manual payroll operation (only 3 percent of businesses with 10-24 employees run payroll manually). If your company offers any sort of retirement plan, the Auto IRA does not apply to it.

According to opinion research by Prudential , the Auto IRA will make small businesses more attractive to its employees. The quality of employee benefits has been proven to help employers recruit and retain employees—but retirement plans have been out of reach for many small businesses.

The Auto IRA will establish a retirement savings vehicle that a small business can administer easily and at minimal cost. As a basic, low-cost way to provide your employees with something of their own, the Automatic IRA is saving made simple. By offering the Auto IRA, you can more effectively compete for employees with many large and medium size companies that already offer their employees retirement savings plans.

No, employers would not even be allowed to contribute. IRAs are limited by the tax code to personal savings from individuals. If an employer wants to make a contribution to a retirement account, it must do so by sponsoring a 401k plan or similar type of retirement savings plan.

Research shows that while many workers may not take action to save on their own, they will save when they learn their company has enrolled them automatically as a way to help them save for retirement. Employees always have the option to opt-out if they choose, but research shows that the overwhelming majority of workers remain in the plans.

Employers would be encouraged to automatically enroll their workers through an automatic election process, most likely through the W-4 deduction forms, with the option for the employee to opt-out.

Employers would receive a $250 per year tax credit for two years. This would help offset any incidental costs associated with adding the IRA deduction to their payroll processing system.

Auto IRAs are not like 401(k) plans, which have additional tax and pension requirements that some small employers find challenging and more time consuming because they involve more cost and regulatory oversight. Auto IRAs would be simple to administer and entail little cost to employers.

No plan qualification rules or IRS approvals;
No responsibility to comply with ERISA (ERISA does not apply to these plans);
No plan documents and adoption agreements;
No employer contributions
No employer responsibility to select, hold, or manage investments;
Automatic accounts also will be easier to provide than SEPS and SIMPLE plans.

Since PEOs handle payroll issues, the effect on the business would be extremely limited. The Auto IRA would be handled by the PEO. There might (or might not) be an incremental increase in cost for using the PEO, which could be partially off-set by the initial tax credit. The business would also share the benefit of improved recruitment and retention.

If you use a payroll service such as ADP, Paychex, etc., you would see minimal impact on your business. You would provide employees with their election to participate in the Auto IRA, perhaps as part of the W-4 process. You would choose an IRA provider (for all your employees, not for each one separately) if your bank did not provide an Auto IRA, or you could use one arranged by your payroll service. Your payroll service would calculate the amount to deduct, process the deductions, etc., and forward the money through direct deposit. You would receive the tax credit of up to $250 per year for two years.

If you use an online payroll service (such as PayCycle, Quickbooks, Intuit, etc), you would see minimal impact on your business. You would provide employees with their election to participate in the Auto IRA, perhaps as part of the W-4 process. You would choose an IRA provider (for all your employees, not for each one separately) if your bank did not provide an Auto IRA, or you could use one arranged by your payroll service. Your payroll service would calculate the amount to deduct, process the deductions, etc, and forward the money through direct deposit. If you do not use direct deposit, you could forward the contributions together along with your Federal tax payments. You would receive the tax credit of up to $250 per year for two years.

If you do your payroll manually (fewer than 3% of employers with 10-24 employees run manual payroll), without the benefit of processing software, you would need to calculate the withholding amounts and transmit the contributions on the same schedule as you use to send in your employees’ payroll and income tax withholding to the government. You would only need to send one check that would include the contributions for all of your employees together along with a notation of how much each employee contributed to his or her account. You might select your existing bank as the Auto IRA provider (if they offer it), or select a different bank, or use an IRS endorsed IRA service provider that you could contact through the Internet or by phone. You could send the contributions to the IRA provider as often as you transmit payroll withholdings. You would receive the tax credit of up to $250 per year for two years.

There will be an extensive educational campaign about what Automatic IRAs are and how they work that will be conducted by both the government and most financial institutions. Your responsibility will be to provide your employees with a short standardized disclosure that you can download from a Web site, which you could include in your hiring packet.

Paperwork will be minimal. If you use automatic enrollment, you will use a simple form, perhaps on the back of the W-4 withholding form if an employee opts out. Otherwise, you will send employee information including the amount they wish to save to the financial institution at the time the account is opened. This will be done through a simple form. If you don’t use automatic enrollment, the form on the back of the W-4 will be used to record the employee's decision whether to save or not along with his or her signature.

Surveys show that employees feel very positive about automatic enrollment, which is commonly used in 401(k) and similar type plans: over 95 percent of those who are automatically enrolled are glad that their company offers the process. About 80 percent of those who opted out of the savings plan felt the same way. Employees will always have a choice to opt-out of the Auto IRA.

Employees also appreciate that their employer has helped them start saving earlier, and save more, than they would have on their own and have positive feelings toward their employer, even if they do opt-out.

Limits will be placed on how often employees can opt-in or out in order to keep employer costs down. After an initial 90 day period in which the employee may withdraw at any time, withdrawals, changes in amount saved, changes in investment, etc. will only be allowed for a pre-announced annual "open season".

Consider the following evidence: less than 10 percent of taxpayers contribute to an IRA, despite tax incentives and industry marketing efforts. In contrast, nearly three quarters of employees who are offered a 401(k) plan make a contribution. Workplace savings vehicles–especially through payroll deduction–are highly effective. The Auto IRA will create a workplace vehicle that is feasible for small businesses, offering a valuable benefit at minimal cost.

Workers who typically do not save on their own, and thus have the least savings. Experience with automatic 401(k) plans has shown that saving rates can climb from less than 20 percent to over 75 percent for many low-income, women and minority workers. Auto IRA encourages those most in need of saving into the savings habit.

No. Employers would bear no responsibility for the investment performance of the IRA.