3700 / May an employer contribute to an IRA on behalf of an employee? May an employer or union establish an IRA for its employees or members?

An employer may contribute to a traditional or Roth IRA on behalf of any eligible employee (or an eligible spouse in some cases). Any contribution made by the employer must be included in the employee’s gross income as compensation for the year for which the contribution was made.¹ The employer’s contribution is treated as though made by the employee and subject to the maximum contribution limits applicable to individual retirement plans ( Q 3656, Q 3659). If the contribution is made to a traditional IRA and the employee is eligible, the employee may take a deduction subject to the limits in Q 3656.The employer deducts the contribution as salary or other compensation and not as a contribution to a retirement plan.² Because amounts contributed by an employer are compensation to the employee, they are subject to FICA (Social Security tax), FUTA (federal unemployment tax), and income tax withholding.³

A trust that will be treated as an individual retirement account may be set up by an employer or association of employees for the benefit of employees, members, or employees of members (or the eligible spouses of any of the foregoing) if the trust meets all the requirements of an IRA ( Q 3641) and there is a separate accounting maintained for each employee, member, or spouse. A contribution made by an employer to a trust on behalf of an employee will be treated as a contribution to an individual retirement plan by such employee. The assets of an employer or association trust may be held in a common fund for the account of all individuals who have an interest in the trust. A trust may include amounts held for former employees or members and employees temporarily on leave. To qualify as an “association of employees” there must initially have been some nexus between the employees (e.g., a common employer, a common industry, etc.). An association may include members who are self-employed.⁴

Employer contributions to an IRA (or employer or association trust that is treated as an individual retirement account) do not need to meet the nondiscrimination rules associated with qualified plans. An employer generally cannot satisfy the coverage requirement for a qualified plan by contributing to an individual retirement account (including an employer or association trust treated as an individual retirement account) or individual retirement annuity on behalf of employees not covered under the qualified plan.⁵

The use of a payroll deduction program to fund employee IRAs will not subject the employer to Title I of ERISA (reporting and disclosure, participation, and vesting, etc.) where employer involvement is limited. The employer’s involvement is so limited where the employer maintains neutrality with respect to an IRA sponsor in its communications with its employees and so is not considered to have “endorsed” an IRA payroll deduction program. The employer must also make clear that its involvement in the program is limited to collecting the deducted amounts and remitting them promptly to the IRA sponsor, and that it does not provide any additional benefit or promise any particular investment return on the employee’s savings.⁶

An employer also may establish “deemed IRAs” for employees under a qualified plan ( Q 3645). An employer may contribute amounts higher than the usual individual retirement plan limits by establishing a simplified employee pension program ( Q 3701) or a SIMPLE IRA (see Q 3706).