What Auto IRA Means for Small Businesses

By: Education & Outreach | Source: AARP.org | May 2009

Automatic, direct-deposit IRAs would give employees an easy way to save money, while they would also allow people who don’t want to save to opt out.Research shows that workers with modest incomes—including women and minority workers—tend to increase their participation dramatically with automatic enrollment.

Automatic IRAs are simplified accounts owned by individuals, not employer-sponsored retirement plans. Accordingly, automatic IRAs have the following advantages:

• No plan-qualification rules or IRS approvals
• No responsibility to comply with ERISA
• No plan documents and adoption agreements
• No employer contributions
• No employer responsibility to select, hold, or manage investments, as illustrated by the following facts:
  • The employer would serve as a conduit, a forwarding agent helping employees move their own money into their own IRAs.
  • For employers without direct deposit, contributions could be sent to a single destination along with normal tax withholdings.
  • Automatic accounts also would also be easier to provide than SEPs (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) plans.

Automatic-IRA processing would be absorbed into payroll services and software—conveniences used by more than 90 percent of affected small employers.

According to a 2006 employer survey by the National Federation of Independent Business, 48.8 percent of small businesses (with 10-19 employees) use an outside payroll processor of some type, and 80.5 percent of those who do payroll in-house use some form of software.

Research by the payroll-processing firm ADP shows that only 3 percent of employers with 10-25 employees do payroll manually.

For employers using external payroll services, payroll software, online payroll processing, or similar procedures—including those that allow direct deposit of paychecks—automatic IRAs would be particularly easy, dovetailing neatly into those arrangements.

• Most employers doing payroll by hand would be exempt, because most of those firms have 10 or fewer employees or have been in business less than two years, although they would be eligible to participate if they wished.
• Even those employers that do payroll by hand and have more than 10 employees could simply send all employee contributions into the IRS with their normal payroll-tax withholdings. In other words, employers would not have to send the contributions to the employees’ individual IRA providers.

Employers would receive up to $250 in tax credits for providing automatic IRAs.

Participating employers would receive a tax credit of $25 for each employee who chooses to save in an automatic IRA, up to $250, for two years.

Automatic accounts would help small businesses compete with larger firms offering retirement benefits.

Most large firms administer retirement plans for their workers. By establishing a type of retirement account that small businesses can successfully administer, the automatic IRA proposal establishes a practical, competitive benefit with little cost.