Worry-free retirement plans for small businesses? The myRA may be the answer.
07.31.2014 Many small business owners find that it is impractical or too costly to offer retirement plans to their employees. Employee retirement plans are highly regulated and subject to very complex tax rules. Now, there may be an answer for businesses of any size: the myRA (My IRA).
What Prompted the myRA
Studies show that around 40% of American workers do not have an employer-sponsored retirement plan. This fact has policymakers alarmed because of growing concern that the retirement savings rate in the U.S. and projected social security benefits fall far short of what is needed to support the baby boomers in their old age. The Treasury Department’s answer to this challenge has been the creation of the myRA, a voluntary program that makes it easy for small businesses to set up direct retirement savings deposits for their employees. The myRA program is set to roll out by the end of the year.
The Obama Administration originally had plans to force businesses to offer an automatic IRA option to employees not covered by an employer-sponsored plan, such as a 401(k). That rule would have applied to employers in business for at least two years who had more than ten employees. The catch is, the mandatory plan would have required Congressional approval. With Congress and the President at an impasse over most new legislation, the Treasury Department created the myRA program through its authority to administer Treasury securities, the savings vehicle used by myRAs.
How myRAs Work
Two of the benefits for small businesses are that employers will not be required to administer the accounts or contribute to them. All employers need to do is set-up ongoing payroll direct deposits into myRA accounts for interested employees. Beyond that, Treasury will handle account set-up and maintenance. There is no employer-matching and no other administrative fees for employers or employees.
Employees start saving with an initial deposit of at least $25 and can elect to make recurring contributions each pay period of $5 or more. MyRA contributions will be invested solely in U.S. debt which is guaranteed against loss. The myRA operates as one Treasury security that is added to continuously. The Treasury security will pay the same variable rate as the Thrift Savings Plans (G Fund) available to employees of the federal government. (Over the last ten years, the G Fund has earned annual compounded interest ranging from 1.47 percent to 4.93 percent.) An obvious disadvantage is that the rate of return is not very inspiring. The return is not much better than a traditional savings account. However, the idea is to get employees who otherwise do not save at all to start the process.
Roth IRA Rules for Employees
MyRAs will work much like Roth IRAs. There is no tax deduction for employee contributions to myRAs. However, the interest earned is tax free as long as it stays in the account for 5 years, and the employee does not draw it out until age 59 ½. The principal balance in the account can be withdrawn tax-free and penalty-free at any time, making the accounts liquid and accessible for an employee’s emergency needs. The accounts also are portable. If savers change jobs, they can maintain their accounts across multiple jobs.
The accounts are subject to the other Roth IRA rules, including the income limits and yearly contribution ceilings. Currently, only married couples earning up to $191,000 a year and individuals earning up to $129,000 a year can contribute. The 2014 annual contribution limit is $5,500, with an additional $1,000 ($6,500) allowed for those taxpayers age 50 or older. Note that these dollar limits are adjusted annually for inflation.
Benefits for Small Business
Small businesses, particularly those with less than 100 employees, often do not have retirement plans because of the expense of administering highly-regulated, tax-qualified plans. MyRAs give small employers an opportunity to offer all of their employees a retirement savings vehicle without the complication of choosing investment options or providing matching funds.
Here are some of the benefits to employers:
- No fees for employers or employees
- No administrative costs other than setting up and maintaining direct deposits into Treasury accounts
- No contribution matching by employers, so no concerns about current and future profitability and ability of employer to fund the plan.
- Employers are not responsible for selecting investment options.
- All employers and employees are eligible to participate.
The employee account owner — not the employer — is responsible for complying with income limits on Roth IRA eligibility and the annual contribution limits.
Benefits to Employees
- As little as $25 to open an account.
- Contribute $5 or more every payday.
- Deposits are automatic every payday.
- No fees.
- Portable – not tied to a single employer.
- Roth IRA tax advantages.
- Contributions can be withdrawn tax free.
- Earnings can be withdrawn tax free after five years and if the saver is 59½.
- Investment solely in guaranteed Treasury securities.
- Savers’ credit may be available.
Employees can build savings for 30 years or until their myRA reaches $15,000—whichever comes first. After that, myRA balances will transfer to private-sector retirement accounts. The mechanism for this change has not been announced by Treasury, but the agency has said it will finalize rollover procedures later this year.
Not a Replacement for Employer Plans
Don’t cancel your employer plan yet. Treasury has emphasized that myRAs are intended for employees who currently do not have access to an employer-sponsored plan or who are not eligible for their employer’s plan. This includes short-term employees, part-time employees, and employees who are otherwise not qualified to participate in their employer’s plan. Also, Treasury has not offered the self-employed direct participation in the program. However, Treasury announced that this idea “will be explored over time, and could be added as feasible.”
More Information on myRAs
The Treasury Department has launched a marketing blitz on this new retirement savings vehicle, beginning with its major effort during National Small Business Week in mid-May. The marketing campaign, dubbed Ready.Save.Grow, even has a Facebook page. More detailed employer information on the myRA program can be found at the Treasury Direct website, www.treasurydirect.gov.