Payroll Deduction: Establishing The Plan

Payroll Deduction IRA

Establishing The Plan

Establishing a Payroll Deduction IRA

A payroll deduction IRA program is easy to set up and operate.

The employer sets up the payroll deduction IRA program with a financial institution, such as a bank, mutual fund or insurance company. The employee establishes either a traditional or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions. The employer withholds the payroll deduction amounts that the employee has authorized and promptly transmits the funds to the financial institution. After doing so, the employee and the financial institution are responsible for the amounts contributed.

As long as the employer keeps its involvement to a minimum, the program will not be treated as an employer retirement plan under Federal law, and the employer will not be subject to the requirements for such plans, including annual filings with the government.

In setting up a program, the employer can limit the number of IRA providers to which it will remit contributions. The employer can designate as few as one IRA provider to receive contributions.

However, it must disclose any limitations or costs associated with an employee’s ability to transfer contributions to another IRA provider before the employee begins to participate in the program.

The employer needs to remain neutral about the IRA provider. It cannot negotiate with an IRA provider to obtain special terms for its employees, exercise any influence over the investments made or permitted by the IRA provider, or receive any compensation in connection with the IRA program except reimbursement for the actual cost of forwarding the payroll deductions.

The employer can:

  • Encourage its employees to save for retirement by providing general information about the payroll deduction IRA program and other educational materials that explain why it is important to save, including the advantages of contributing to an IRA;
  • Answer employees’ questions about the payroll deduction program and refer inquiries to the IRA provider; and
  • Provide informational materials written by the IRA provider, as long as the materials do not suggest any endorsement by the employer.

However, the employer should make clear that its involvement in the program is limited to collecting employee contributions and promptly sending them to the IRA provider.


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