Retirement plans are a standard part of U.S. corporate employee benefit packages. While household employers in most states aren’t legally mandated to offer nannies or other household employees a retirement plan, forward-thinking families do so to attract top-tier candidates and retain their best employees in today’s competitive job market.
If you choose to offer a retirement plan, you must comply with IRS tax and administrative requirements outlined in the U.S. Employee Retirement Income Security Act (ERISA). Two of the most straightforward options for household employees are Traditional Individual Retirement Accounts (IRAs) and a Roth IRA. Both are simple to establish and make excellent employee benefits.
What are IRAs and Roth IRAs?
An IRA is a tax-advantaged savings plan authorized by the federal government to help individuals accumulate funds for retirement. Both Traditional and Roth IRAs allow individual taxpayers to contribute 100 percent of their earnings up to the IRS-specified maximum dollar amount. The IRS adjusts these maximum annual contributions and age 50+ catch-up limits periodically to keep pace with inflation.
- Traditional IRA: Contributions may be tax-deductible, meaning your employee lowers their current taxable income, but distributions during retirement will be taxed.
- Roth IRA: Contributions are made with after-tax dollars (not tax-deductible), but the principal and interest accumulate completely tax-free.
A Roth IRA is often preferred by household employees who want their qualified future distributions to be entirely tax- and penalty-free, allowing them to build a retirement nest egg without worrying about future tax hikes.
The Benefits of a SIMPLE 401(k) Retirement Plan
A robust third option is offering a specialized 401(k) plan. Offered through the National Household Employers Association (NHEA), a SIMPLE 401(k) retirement plan for nannies and household staff gives you a massive recruiting advantage. It helps your employee build an excellent source of retirement income through the power of tax-deferred growth.
Key Features of a Household SIMPLE 401(k)
- Tax Savings: Household employees can make pre-tax savings via payroll deferral up to $24,500. Staff members aged 50 and older can defer an additional $4,000 as a catch-up contribution.
- Roth Deferrals: Roth 401(k) options are available. Employees pay income taxes on the deferred contribution upfront, but their investment earnings are generally tax-free upon distribution.
- Flexibility: Employees have the freedom to modify their payroll deferral amounts as their financial situations change.
- Mandatory Employer Contributions: Employers must match the employee’s contributions dollar-for-dollar up to 3% of the employee’s gross pay. This serves as a powerful incentive to reward and retain valuable workers.
- Immediate Vesting: All money contributed to the account (by both you and your worker) is 100% immediately vested. Your employee fully owns their plan benefits from day one.
- Self-Directed Investments: Employees can self-direct their investments from a monitored list of low-cost mutual funds with no commission fees. Fiduciary advisors are available to counsel employees on suitable investment choices.
- Seamless Online Enrollment: Once you adopt the plan, your employee can easily enroll online, choose their deferral percentage, and select their investments.
- Fiduciary Support: Employees gain access to fiduciary financial advisors who are legally bound to act in the employee’s best interest, avoiding conflicts of interest while providing professional advice.
- Portability: If your employee moves on to a new family who also uses GTM Payroll & HR, that family can easily adopt the existing plan. Alternatively, the employee can roll their 100% vested balance into another qualified retirement plan or traditional/Roth IRA.
What States Require Household Employers to Offer a Retirement Plan?
In a handful of states, with more considering legislation, employers with as few as a single employee are required to offer a retirement plan. You can either set up a plan through the NHEA and claim an exemption with your state or sign up for the state-run plan.
States with retirement plan requirements include:
- California
- Hawaii (program projected to launch mid- to late-2026)
- Maryland (must be an employer for two calendar years)
- Oregon
- New York State (for employers with 10 or more workers)
- Washington State (scheduled to launch in 2027)
GTM Can Help
Setting your household employee up for long-term financial success doesn’t have to be a headache. For more information on offering a retirement plan or to set up an account today, call us today at (800) 929-9213.
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