How to Offer a Retirement Plan to a Household Employee

Retirement plans are a standard part of U.S. corporate employee benefit packages. While not legally mandated to offer nannies or other household employees a retirement plan, families with household help may consider doing so to attract top candidates to their jobs and retain their best employees.

If a retirement plan is offered, you’ll need to comply with IRS tax and administrative requirements as outlined in the U.S. Employee Retirement Income Security Act (ERISA). Two popular options for retirement benefits for household employees are the Individual Retirement Account (IRA) and the Roth IRA. Both are fairly simple programs to establish as an employee benefit and suitable as a benefit for household employees.

What are IRAs and Roth IRAs?

An IRA is a special savings plan authorized by the federal government to help people accumulate funds for retirement. Traditional IRAs and Roth IRAs allow individual taxpayers to contribute 100 percent of their earnings up to the IRA’s plan-specified maximum dollar amount. Each year, the IRS sets maximum annual contributions for IRAs, with catch-up contributions for people ages 50 and over.

Traditional IRA contributions may be tax-deductible, whereas Roth IRA contributions are not. Roth IRA principal and interest accumulate tax-free. A Roth IRA usually is preferred by those ineligible for the tax deductions associated with the traditional IRA or by those who want their qualified Roth IRA distributions to be tax- and penalty-free, which depends on all conditions being met. Some people prefer a Roth IRA as a means to simply build a retirement nest egg without the worry of paying taxes at a later date (Roth contributions have already been taxed).

Benefits of a 401(k) Retirement Plan

A third option is to offer a 401(k) plan. Offered through the National Household Employers Association (NHEA), a SIMPLE 401 (k) retirement plan for nannies and other household employees will not only give you a recruiting advantage over other families without a 401(k) plan and a retention tool for your employee, but it will also help your employee build an excellent source of retirement income and experience the benefits of tax-deferred growth.

Key features of this type of retirement plan include (effective January 1, 2024):

Tax Savings

Household employees have the potential for pre-tax savings via payroll deferral of up to $16,000; those 50+ years old can defer another $3,500 as a catch-up contribution.

Roth Deferrals

Roth 401(k) deferrals are allowed. Employees will pay income taxes on the deferred contribution. In most cases, however, the earnings are not subject to income taxes upon distribution.

Flexibility

Household employees have the option to modify deferral amounts.

Employer Contributions

The employer must make mandatory contributions on a dollar-for-dollar match basis of up to three percent of the employee’s gross pay, which can be used to reward and retain valuable household workers.

Vesting

Money that is contributed to an account by an employer and their worker is always 100 percent vested. Vesting refers to an employee’s “ownership” of their plan benefits.

Self-direction of investments

Household employees can self-direct their investments from a list of monitored, low-cost mutual funds. There are no restrictions on making changes, and no commissions are assessed. Advisors are available to help counsel employees and understand investment options in the plan that may be suitable for them.

Online enrollment

Once a household employer adopts a plan, their worker can enroll online, choosing the amount they wish to defer and how they would like to invest their contributions.

Employee Support

Household employees have access to fiduciary financial advisors who can provide them with professional fund management and one-on-one advice. A fiduciary is an individual who will act in the best interest of the employee by buying and selling investments that are the best fit for the employee and avoiding conflicts of interest.

Transferability

If the household employee changes families and their new family uses GTM Payroll Services, that family can adopt the plan and continue 401(k) contributions, or the employee can roll their money into another qualified retirement plan or individual retirement account (IRA). Employees will always be 100 percent vested in their rollover account. Assistance is available for any employee who wishes to roll over their account.

GTM can help

For more information on offering a retirement plan for your household employee, or to set up an account, give us a call at (800) 929-9213.

Hiring a nanny?

Download Your Guide to Hiring a Nanny. In this guide, we lay out the steps on how to hire a nanny the right way and maintain a strong relationship with your employee.