Bob   Parrish   CPA, P.C.

A Professional Corporation

Remember........"You can have everything in  life you want, if you just help enough other people get what they want."  -Zig Ziglar.

Payroll Deduction IRA

 The Payroll Deduction IRA is probably the simplest retirement arrangement that a business can have. In fact, no plan document need be adopted under this arrangement.

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

A Payroll Deduction IRA has a life cycle, with four distinct stages through which the plan evolves.  The following articles offer a basic understanding of the life cycle of a Payroll Deduction IRA. 

• Choosing a Payroll Deduction IRA
• Establishing a Payroll Deduction IRA
• Operating a Payroll Deduction IRA
• Terminating a Payroll Deduction IRA
• Additional Resources

Choosing a Retirement Plan: Payroll Deduction IRA

Highlights:

The Payroll Deduction IRA is probably the simplest retirement arrangement that a business can do.  In fact, no plan document need 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 IRA or a Roth IRA) with a financial institution.  The employee then authorizes a payroll deduction for the IRA.

Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution.  In general, if you offer this arrangement to any employee then you should offer it to all employees.

The Payroll Deduction IRA is essentially a “no fuss, no muss” situation.

Information List:

Pros and Cons:

• Easy to set up and operate.
• Little administrative cost or requirements.
• As the employer, you receive little credit for this service from your employees.
• No deductions for your business.

Who Contributes:  Only the employees. The employees control where their money is invested.

Contribution Limits:  $3,000 in 2002-2004; $4,000 in 2005-2007; and $5,000 for 2008.  A special “catch-up” contribution is permitted if the employee is aged 50 or over.  This additional contribution is $500 per year for 2002-2005 and an additional $1,000 per year for 2006 and beyond.

Filing Requirements:  Employer has no filing requirements.

Participant Loans:  Not permitted.  Also, the assets may not be used as collateral.

In-Service Withdrawals:  Yes, but subject to income taxes and 10% penalty if under age 59-1/2.

Establishing a Payroll Deduction IRA

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

Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution. In general, if you offer this arrangement to any employee, then you should offer it to all employees.

Operating a Payroll Deduction IRA

 Once the initial paperwork is done, there are no annual filing requirements for a Payroll Deduction IRA. The lack of filing requirements cuts down on the administrative costs of having a Payroll Deduction IRA.

Generally, any employee who performs services for your company is eligible to be included in a Payroll Deduction IRA. If you offer the payroll deduction service to one employee, then you should offer it to all employees.

By establishing a Payroll Deduction IRA, you the employer have chosen a plan that makes each employee responsible for funding his or her IRA. Contributions to each employee’s account are limited, as previously discussed in Choosing a Payroll Deduction IRA. After the Payroll Deduction IRA contributions are sent to each financial institution, you have no further responsibility for the amounts contributed. IRS Publication 560 helps self-employed individuals determine the amount of their maximum deduction.

While the financial institutions selected will manage the funds, each employee has the freedom to move their IRA assets from one IRA to another. Depending on the financial institution, Payroll Deduction IRA contributions can be invested in stocks, mutual funds, money market funds, savings accounts and other similar types of investments. Each employee is always 100% vested in (or has total ownership of) the contributions to their Payroll Deduction IRA.

How Does a Payroll Deduction IRA Work?
Rebecca works for the Pasco Collection Company, which does not have an employer-sponsored pension plan. However, Pasco has offered its employees the opportunity to have deductions taken from their salaries (which are paid using electronic deposit) to contribute to IRAs that the employees have set up for themselves. Rebecca signs up for the program and has $100 per bi-weekly paycheck deposited into her IRA for a yearly total of $2,600 (which is below the $3,000 limit in 2003).

Terminating a Payroll Deduction IRA

If the time comes when a Payroll Deduction IRA no longer suits the purposes of your business, consult with your financial institution to determine if another type of retirement plan (or, perhaps, no plan at all) might better suit your needs.

To terminate a Payroll Deduction IRA, notify the your payroll organization that you will no longer be making this service available to your employees and that you want to terminate the contract or agreement with it. You must also notify your employees that the Payroll Deduction IRA has been discontinued.

You do not need to give any notice to the IRS that the Payroll Deduction IRA has been terminated.

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Bob Parrish CPA, P.C.

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