Payroll Deduction IRAs for Small

B u s i n e s s e s
Payroll Deduction IRAs for Small Businesses is a joint project of the 

U.S. Department of Labor's Employee Benefits Security Administration (EBSA) 

and the Internal Revenue Service. 

It is available on the Internet at: www.dol.gov/ebsa. For a complete list of 

publications or to speak with a benefits advisor, call toll free: 

1-866-444-EBSA (3272). 

Or contact the agency electronically at www.askEBSA.dol.gov.

This material is available to sensory impaired individuals upon request: 

Voice phone: (202) 693-8513 

TDD: (202) 501-3911 

This publication constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. 
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Want to help your employees save

for retirement but don't want the

responsibility of an employee benefit

plan? Think about a pay roll deduction

IRA program.

A payroll deduction individual retirement account

(IRA) is an easy way for businesses to give employe e s

an opportunity to save for retirement. The

employer sets up the payroll deduction IRA 

program with a bank, insurance company or other

financial institution, and then the employees

choose whether and how much they want deducted

from their paychecks and deposited into the IRA.

Employees may also have a choice of investments

depending on the IRA provider.

Many people not cove red by an employer re t i re m e n t

plan could save through an IRA, but do not do so

on their own. A payroll deduction IRA at work can

simplify the process and encourage employees to

get started.

Under federal law, individuals saving in a traditional

IRA may be able to receive some tax advantages on

the money they save, up to a certain amount, and

the investments can grow tax-deferred. If the

individual selects a Roth IRA, the employe e ' s

contributions are after-tax and the investments

grow tax-free. 

Advantages of a payroll deduction IRA: 

❏ The payroll deduction IRA is a simple and

direct way for employees to set up an IRA and

save for their retirement.

❏ The employee makes all of the contributions.

T h e re are no employer contributions. By making

regular payroll deductions, employees are able

to contribute smaller amounts each pay period

to their IRAs, rather than having to come up

with a larger amount all at once.

❏ There is little administrative cost and no annual

filings with the government. 

❏ There is no requirement that an employer have

a certain number of employees to set up a payro l l

deduction IRA.

❏ The program will not be considered an employe r

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 employe e s

may assist an employer to attract and retain

quality employees.

This booklet provides a simplified ove rv i ew of payro l l

deduction IRA programs and is not a legal

i n t e r p re t a t i o n .

ESTABLISHING

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

p e r s o n a l 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 re q u i re m e n t s

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 with respect

to the IRA provider. It cannot negotiate with an

IRA provider to obtain special terms for its employe e s ,

exercise any influence over the investments made or

permitted by the IRA prov i d e r, or re c e i ve any

compensation in connection with the IRA

p ro g r a m 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 on 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

e m p l oyee contributions and sending them pro m p t l y

to the IRA provider.

OPERATING

Ge n e r a l l y, any employee who performs services for

the business (or “e m p l oye r”) can be eligible to

p a rt i c i p a t e . 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. Participants are always 100% vested in (in other words,

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 59 , there may also be a

10% additional tax.

Employee's tax-deferred contributions are limited:

$4,000 in 2006 & 2007

$5,000 in 2008

Additional “catch-up” contributions are permitted

for employees age 50 or over. This special catch-up

amount is currently limited to $1,000 per year.

The employees control where their money is inve s t e d

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 for the program are low

because the program is not subject to the gove r n m e n t

filings, administrative and fiduciary requirements

imposed on employer retirement plans (such as

401(k) plans).

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The employer may pay fees charged by the IRA

p rovider 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 itself.

TERMINATING

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 such 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.

RESOURCES

The U.S. Department of Labor's (DOL's)

Employee Benefits Security Administration and the

IRS feature this booklet and other information on

retirement plans on their web sites:

www.dol.gov/ebsa — Click on “Publications” or

“Compliance Assistance for Small Employers” for

information you and your employees can use. 

www.irs.gov/ep — Click on “More Topics” in the

“Retirement Plans Community Topics” section and

then click on “Types of Plans.”

Publications can be ord e red by calling the approp r i a t e agency's toll free number — for the IRS, 

1-800-TAX-FORM (829-3676) or for DOL, 

1-866-444-EBSA (3272).

The following jointly developed publications are

available on the IRS and DOL web sites and

through the toll-free numbers:

❏ Choosing a Retirement Solution for Your Small

Business, Publication 3998, provides an

overview of retirement options available to

small businesses. 

❏ Retirement Plan Correction Programs,

Publication 4224, provides a brief description

of the IRS and DOL correction programs.

❏ Retirement Plan Correction Programs CD-ROM,

Publication 4050, provides information on the

IRS and DOL correction programs.

❏ SEP Retirement Plans for Small Businesses,

Publication 4333, provides a brief description

of this type of retirement plan.

❏ SIMPLE IRA Plans for Small Businesses,

Publication 4334, provides a brief description

of this type of retirement plan.

❏ 401(k) Plans for Small Businesses, Publication

4222, provides information regarding the establishment and operation of a 401(k) plan.

Related materials available from the DOL

For employees:

❏ Savings Fitness...A Guide to Your Money and

Your Financial Future (also in Spanish)

❏ Taking the Mystery Out of Retirement Planning

❏ Top Ten Ways to Prepare for Retirement (also in

Spanish)

❏ Women and Retirement Savings (also in Spanish)

Related materials available from the IRS

❏ Choosing a Retirement Plan for Employees of Tax

Exempt and Government Entities, Publication

4484.

❏ Individual Retirement Arrangements (IRAs),

Publication 590

❏ Lots of Benefits, Publication 4118.

❏ Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Publication 560.

❏ The Retirement Plan Products Navigator,

Publication 4460.
U.S. Department of Labor