There are some practical ways an employer can help their nanny build a retirement savings account.
Employers can set up a SEP-IRA to help build a retirement savings account for their nanny. The contributions are 100% funded by the employer. Sometimes employees will ask to ‘defer’ a raise and have the $50 or so a week contributed by the employer into the SEP-IRA on their behalf. This benefits the employer as there are no employment taxes due on those contributions. The nanny benefits because her total income is lower, reducing her income taxes. SEP-IRA contributions are 100% vested to the employee.
Be advised, if you have more than one employee, you must offer this plan to all employees. This is referred to as a non-discrimination provision, and is mandated in the tax code.
Contributions to a SEP can be made between 0% to 25% of compensation up to a maximum of $69,000 (2024). Contributions to a SEP IRA can be very flexible. The employer is not required to make contributions on an annual basis but must contribute the same contribution percentage for all employees.
The easiest solution (albeit not the least expensive to the employer) is to make a contribution to a nanny’s IRA. If she does not already have an IRA established, this can be done at any brokerage firm or bank.
When an employer makes a contribution to a nanny’s traditional IRA, this is reported as additional income to the nanny. Social Security and Medicare taxes are due on the amounts. Most employers ‘gross-up’ the contribution. For example, a net $2,000 contribution would add $2,166 to the nanny’s reported income and cost the employer $2,330 to make after Social Security/Medicare taxes are accounted for. The nanny may elect to deduct this contribution from current year income (Traditional IRA) or may pay the income taxes on the contribution in the current year and have tax free distributions at a later date (ROTH IRA).
The contribution limits to a traditional IRA are as follows:
| YEAR | AGE 49 & BELOW | AGE 50 & ABOVE |
|---|---|---|
| 2023 -2024 | $6,500 | $7,500 |
| Contribution limits rise in increments of $500 depending upon the level of inflation. | ||
Employers who wish to make retirement savings contributions in excess of the annual IRA contribution limits and with employee participation may consider establishing a SIMPLE IRA. A SIMPLE IRA plan is a Savings Incentive Match PLan for Employees and, like a 401K, there is an employee contribution in the form of payroll deductions and a separate employer contribution. Employer contributions are established at account setup and are typically a dollar for dollar match of the nanny’s contribution, up to 3% of the nanny’s annual salary. Each employee is always 100% vested in (or, has ownership of) all money in her SIMPLE IRA.
The nanny’s contribution to the SIMPLE IRA is subject to Social Security and Medicare taxes, but not to income taxes. The employer’s matching contribution is tax free. The nanny’s contribution to the SIMPLE IRA reduces her income subject to Federal and State income taxes on her W-2 and is separately reported on her W-2.
Unlike the SEP plan nondiscrimination rules, you do not need to cover all employees under a SIMPLE IRA plan. The employer may exclude any employees who have not earned at least $5,000 during any two preceding years and are not expected to earn at least $5,000 in the current year.
Generally speaking, a true 401K plan is not a viable option for household employers. Like the SEP plans, a nondiscrimination rule applies, meaning that all employees in your household must be covered. Also, 401K plans typically require that the family engage a plan provider or plan administrator (at cost to the employer) to comply with all administrative, record keeping, and participant statements, as required by the law.
Household employers often shy away from formalizing a way to help build a retirement savings account for nannies because of the administration involved. When you subscribe to HWS’ complete household employee payroll service, employee and employer contributions can be automated, and we can remit retirement savings directly to the retirement account. Effortless and hands free – that is a win-win for the household employer and their nanny or senior caregiver.
