Want to help your employees save for retirement but don’t want the responsibility of an employee benefit plan?

Payroll Deduction IRA is probably the simplest retirement arrangement that a business can have. No plan document needs to be adopted under this arrangement.

  • The employer has no filing requirements.
  • Only employees make the contributions.
  • Any size business can provide this.

Under a Payroll Deduction IRA, an employee establishes an IRA (either a Traditional or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction for the IRA.

The employer’s responsibility is simply to transmit the employee’s authorized deduction to the financial institution. In general, if this arrangement is offered to any employee then it should be offered to all employees.

Advantages of a Payroll Deduction IRA:

  • The payroll deduction IRA is a simple way for employees to set up an IRA and save for their retirement.
  • The employee makes all of the contributions. There are no employer contributions. By making regular payroll deductions, employees are able to contribute smaller amounts to their IRAs each pay period, rather than having to come up with a larger amount all at once.
  • Administrative costs are low and there are no annual filings with the government.
  • There is no requirement that an employer have a certain number of employees to set up a payroll deduction IRA.
  • The program will not be considered an employer retirement plan subject to Federal requirements for reporting and fiduciary responsibilities as long as the employer keeps its involvement to a minimum.
  • Providing a payroll deduction IRA for employees may assist an employer in attracting and retaining quality employees.

Operating a Payroll Deduction IRA

Generally, any employee who performs services for the business (or “employer”) can be eligible to participate. The decision to participate is up to the employee and an IRA may not be appropriate for all individuals. The employees should understand that they have the same opportunity to contribute to an IRA outside the payroll deduction program and that the employer is not providing any additional benefit to employees who participate. Each employee determines the amount they want deducted for contribution to their IRA. Employees are always 100 percent vested in (have ownership in) all of the funds in their IRAs. Participant loans are not permitted. Withdrawals are permitted anytime, but they are subject to

income taxes (except for certain distributions from nondeductible IRAs and Roth IRAs). If the employee is under age 59½, there may also be a

10 percent additional tax. Employees’ contributions are limited to $5,500

for 2016 and for 2017 (see for annual updates). Additional “catch-up” contributions are permitted for employees age 50 or over. This special catch-up amount is limited to $1,000 per year. The employees control where their money is invested and they also bear the investment risk. The

financial institution holding the IRA manages the funds. An employee may move the IRA assets from one IRA provider to another. The employee should be made aware that the employer does not guarantee or promise any rate of return. The employer is merely acting as a conduit.The employer’s costs are low because the program is not subject to the government filing, administrative and fiduciary requirements imposed on employer retirement plans (such as 401(k) plans).The employer may pay fees charged by the IRA provider for services in connection with establishing and operating the payroll deduction process. The employer may pay its own internal costs (such as bookkeeping and overhead) for setting up and operating the program. However, the employee must pay the fees related to setting up and maintaining the IRA.

*Participant Loans ARE NOT Permitted

The assets may not be used as collateral. In-Service Withdrawals: Yes, but subject to income tax and 10% additional tax if under age 59 ½

Terminating a Payroll Deduction IRA

A payroll deduction IRA program can be terminated at any time. If the employer decides that a payroll deduction IRA program no longer suits its business needs, it simply notifies the payroll department.

The employer also should notify its employees that the program is being terminated. The employer may need to notify the IRA provider(s) that it will no longer be making deposits. No termination notice is required for the IRS. Although the employer’s involvement will end, the employees can continue to save through their IRAs working directly with the IRA provider.