Tuesday, June 21, 2011

Payroll Deduction IRA

This is a not a new topic but the question has come up:

Can an employer setup an IRA for their employees, withhold from their paychecks and remit the monies directly to the financial institution?

You bet.

In Publication 4587, Payroll Deduction IRAs for Small Businesses, the IRS clarifies that an employer can do what we described above. The key point is to keep the employer involvement to a minimum, as the program will not be treated as a retirement plan, with its attendant rules, requirements and filings. With this arrangement there is no minimum number of employees who have to participate, nor is there a discrimination issue. The employee unfortunately has to pay the annual cost for the IRA, if there is one.

Notice what the above does NOT do: the employer cannot make an employer contribution to the plan. All the monies described are the employees’ monies.

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