May, 2018

IRA Payroll Deduction Plans - More Employers (Including Banks) and Employees
Should Be Participating

Retirement statistics almost always indicate many individuals are not saving or investing what they should to ensure a financially secure retirement. All employers, including a financial institution which is an IRA custodian/trustee should be thinking - should we be helping our employees by offering a payroll deduction program. Such a program can be sponsored in addition to another retirement plan, be it a 401(k) plan, profit sharing plan, SEP IRA plan or SIMPLE IRA plan.

Financial institutions serving as an IRA custodian/trustee should be ready and able to help its employer customers with their payroll deduction programs. A person does not need an employer to assist with making IRA contributions, but most employees will appreciate their employer's participation. As with any IRA, once the funds go into the employee's IRA, the funds are always 100% vested or owned on behalf of the individual.

What is a payroll deduction program? An employer will need to decide what payroll deduction services it will render and then communicate its policies and procedures to its employees. There is no legal requirement to offer such services to all employees, but most employers would choose to do so.

The employer will notify its employees that an employee can complete a payroll deduction form authorizing that an
amount be withheld from their payroll and then contributed to their traditional IRA and/or Roth IRA. Although normally done on a periodic basis, the payroll deduction can either be done on a periodic basis or on a nonperiodic basis.

The employee may establish their traditional IRA or Roth IRA at whatever financial institution they choose. However, it may be possible the employees would accommodate the employer's desire to deal with just one financial institution. An employer has the responsibility to transmit the withheld payroll funds to the IRA custodian on a timely basis. Once contributed, the employer would have no further responsibility.

As long as the employer limits its actions as discussed above, the payroll deduction plan is not an ERISA pension plan subject to the many laws and reporting requirements applying to an ERISA plan. There is no annual filing or reporting requirements. There is no duty to complete a person's Form W-2 to show participation in a payroll deduction program. Participation in a payroll deduction program does not make a person an active participant in a retirement plan for purposes of determining whether a person is eligible to claim a tax deduction for their contribution. The individual is responsible (and the employer is not responsible) to comply with the contribution and tax deduction rules.

An employer can decide if it would pay an employee additional compensation (after-tax compensation) so that the employee would be more willing to instruct to have a payroll deduction contribution. There are no formal IRS rules governing what an employer is to do if it decides to terminate its payroll deduction program. An employer should notify its employees that as of a certain date the payroll deduction program has been terminated.

There is IRA business to be gained by assisting your business clients with establishing a payroll deduction program. And a financial institution sponsoring a 401(k) plan can also sponsor a payroll deduction IRA program for its employees. Help your employees save/invest more for retirement.