Payroll Deduction: Operating The Plan

Payroll Deduction IRA

Operating The Plan

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.


Find out if a Payroll Deduction Plan makes sense for your business,
contact Vermillion Financial Advisors today.

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