Why would an employer offer an IRA and a 401k?


The one thing you can truly say about pensions, retirement income plans and all that is that it is like acronym city isn’t it? An IRA stands for ‘individual retirement account’ and it is a savings investment fund of money contributed to by both employees and their employer. The money is invested in order to provide capital growth and profit for the employees’ income in retirement. A 401(k) is also a contributory retirement fund.

So having explained that, we come back to the title question, why would an employer need both 410(k) and IRA? Well, an employer might need an IRA for those people who are not eligible to contribute to the 401(k) fund. So if the employer wishes to cover ALL employees who want to buy into retirement planning with ‘direct from pay packet’ deductions they may need to run both 401(k) and IRAs.

You are probably thinking the employer obligations are complex and you are right, but other countries are the same like this example – Industry Super

For employees that are eligible for the 401(k) the employer is ONLY allowed to maintain this version of the retirement fund. This begs the question, who is eligible for the 401(k) fund? The answer here is workers who have earned at least $5000 from their employment in the previous year and who have more than a year of service with the company and are over 21. The ‘simple’ 401(k) and IRA funds are for employers with no more than 100 employees.

There is no age restriction for the IRA. Rather any member of staff who earned at the $5,000 minimum over any two previous years and is likely to earn $5,000 in the current year must be permitted to join in contributing to the plan. For both versions of the plans, the employer can opt to implement less rigid joining requirements.

Because of the small size and large numbers of these retirement funds they are not subject to the non-discrimination reviews that are required for bigger organizations. Both plan versions are however subject to the 60-day notification rule. The deadline to set up for both 401(k) and IRA plans is from January 1st to Oct of the current year. This deadline allows workers to salary deferral contributions before the start of the next year.

The employer must inform all eligible employees for the year the plan is set up and for each year the employer continues to run the benefit plan. The notification period must be at least 60 days in advance of the employee becoming eligible to contribute to the plan. This publicity must have a statement of the contributing employee’s right to make salary-deferral payments into the plan and to withdraw their membership in the plan.


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