How do ESAs compare to 401(k), IRA, and other retirement plans?
Retirement funding represents one of the most important job benefits you can offer to attract the best talent. With so many options, deciding which is the best fit for your employees can be a challenge. Do you go with a 401(k)? Let them set up an IRA?
How about an Emergency Savings Account (ESA)? This alternative workplace savings program may be just the thing your employees want and need. We explain how ESAs work and compare them to traditional retirement funds so you can decide which is best.
Defining the ESA
With an ESA, employees contribute money from their paychecks and the employer deposits it into their account. Unlike many retirement accounts, contributions are taxed as income before being transferred. The big difference is that ESA funds can also be withdrawn at any time without having to pay early withdrawal penalties, fees, or taxes. Like other types of retirement accounts, employers can choose to match a percentage of their employees’ contributions.
Why would employees want an ESA?
COVID-19 certainly proved at least one thing – that after the last year and a half, we all know that a health or financial emergency can strike at any time. A job loss or reduced income can make it difficult to pay the mortgage/rent, car payments, and other bills.
There are many reasons families might need access to emergency funds, from paying medical bills to unexpected home repairs or buying a new car. An ESA makes it easy and automatic for employees to set money aside for any type of emergency.
So, how does an ESA compare to other popular retirement funds? Let’s take a look.
Many businesses offer a 401(k) plan as part of their benefits program. These retirement accounts are popular because they offer tax breaks for employees. In fact, they’re often called “pre-tax plans,” since employee contributions are not taxed. Employees can typically choose from a set of mutual funds to invest in. Upon retirement, the employee can withdraw the money in the 401(k), at which time the funds will be taxed.
401(k) vs. ESA
While the funds deposited in a 401(k) are not subject to taxes beforehand, employees do get taxed when they withdraw the funds. There can also be hefty penalties and fees if an employee withdraws funds before he or she retires.
With an ESA, deposited funds have already been taxed so employees will not be taxed again. They can also withdraw funds at any time without paying penalties or fees.
A Roth 401(k) comes with the same contribution limits as a traditional 401(k). However, it doesn’t offer tax-deferred contributions. Even so, employees won’t pay a tax if they withdraw the funds after age 59.5 and if they’ve held the account for a minimum of five years.
Employers can offer to match contributions but the funds must be deposited into a traditional 401(k) account.
A 403(b) plan is designed for non-profit organizations like hospitals, school systems, and churches. Employees can make tax-deductible contributions from each paycheck, up to a certain amount. Employers can choose to match funds, up to a certain amount. The money is subject to taxation when it’s withdrawn. Early withdrawal also results in fees and/or penalties.
Roth 401(k) and 403(b) vs ESA
An ESA does not offer tax-deductible contributions for employees. However, the funds are not taxed upon withdrawal. There are also no fees and/or penalties for early withdrawal.
Individual Retirement Account (IRA)
An IRA is another familiar name when it comes to retirement accounts. Several types of IRAs can be offered as part of your employee benefits. Some allow you to match funds, while others don’t.
Payroll deduction IRA – As the name implies, funds to this type of IRA are automatically taken from employees’ paychecks. Employees can decide how much to deduct, with a maximum amount allowed each year. Unlike a 401(k), employers cannot offer matching funds for a payroll deduction IRA.
Simplified Employee Pension IRA (SEP IRA) – With this fund, employers can offer to match contributions. Business owners can also take a tax break based on the contributions made.
Simple IRA – This is a savings incentive match plan designed for small businesses with less than 100 employees. Employers can contribute up to 2% of an employee’s salary or match dollar-for-dollar up to 3%.
IRA vs. ESA
There are different tax advantages to traditional IRA, Roth IRA, and SEP IRAs. However, all types of IRAs apply fees and/or penalties for early withdrawals of funds.
Protect your employees from financial difficulties with an ESA
An ESA is an effective way to protect your employees from financial disaster. Whether due to a global pandemic or a personal need, ESAs are a benefit that can reap unexpected rewards for valued team members in a time of need.
SecureSave is the first purpose-built emergency savings program. Both employees and employers remark on how simple the app is to use compared to other benefit programs. It's also much more affordable compared to other financial wellness benefits in the market.