Payroll Deduction IRA
Employees need incentives to stay with companies long term, and businesses offering an IRA plan is one way to encourage long-term workers. However, the process involved in preparing and managing an IRA may be costly and time-consuming. Payroll Deduction IRAs are a viable alternative to traditional IRAs. They require little cost to start and little to maintain. The tax advantages and simplicity involved in establishing and maintaining this kind of IRA also are attractive to employees.
Setting up Payroll Deduction IRA
The employer sets up a Payroll Deduction IRA similarly to how many businesses establish traditional IRAs, through financial institutions such as banks or insurance companies. They can decide if the IRA will be treated in a fashion like a traditional IRA (not taxed going in, taxed taking out) or as a Roth IRA (taxed going in, not taxed taking out). The employer withholds set amounts from employees and contributes to the IRAs.
Operating a Payroll Deduction IRA
Generally any employee can participate in a Payroll Deduction IRA. Employees set the amounts they wish to contribute to the IRA and can withdraw at anytime. However, withdrawing from the IRA may be subject to taxes and penalties (if they are below 59 ½ years of age). Employees are always 100% vested in their Payroll Deduction IRA funds. For 2017, the contribution limit for employees to Payroll Deduction IRAs is $5,500.
So long as the employer keeps involvement in the IRA to a minimum, the IRA will not be treated like a regular IRA program under Federal law. This includes annual filings and other fiduciary requirements. The employer may simply pay some fees to the IRA provider and some internal costs. This translates into a low-cost savings plan provided by employers.
Employers may terminate the Payroll Deduction IRA at any time should they decide it no longer serves their purposes. Employers simply inform their provider to end the IRA. No IRS filing is necessary. Employees can continue to provide funds to their IRA by discussing it with the IRA provider.
Deciding on an IRA for your business is one of many questions business owners consider on top of other operational and accounting needs. Having a supporting team knowledgeable in accounting can help answer those future-looking questions. We at MiklosCPA can be such a firm. We are based in California, but utilize contemporary “virtual office” services coupled with personalized, periodic communications to support you and your business needs. If you would like to learn more about our services, please contact us.