Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Can Your Business Help its Employees Save in 2014 Via an Automatic Payroll Deduction IRA?

Posted by William Byrnes on February 3, 2014


This artticle discusses one avenue for retirement planning solutions for small businesses. Financial Planners who have small business clients may consider a discussion on the automatic payroll deduction IRAs as one simple way to help employees save for retirement.

A payroll deduction individual retirement account (IRA) is one simple way for businesses to give employees an opportunity to save for retirement. The program is easy to implement; 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. Depending on the IRA service provider, some employees may also have a choice of investments depending on the IRA provider. Wealth managers can add value to employees and employers by, not only establishing a plan, but by also working with employees to help them manage their IRAs.

Under a payroll deduction IRA, the employee makes all of the contributions, thus there 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.

One advantage of these accounts is that there is little administrative cost and no annual filings with the government. Moreover, businesses of any size can participate as there is no requirement that an employer have a certain number of employees to set up a payroll deduction IRA.

Another element that makes the program attractive to some small businesses is that the program will not be considered an employer retirement plan subject to Federal requirements for reporting and fiduciary responsibilities as long as the employer keeps its involvement to a minimum.

Here’s how the IRAs generally work: 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 personal 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.

Generally however, 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 employees, exercise any influence over the investments made or permitted by the IRA provider, or receive any compensation in connection with the IRA program except reimbursement for the actual cost of forwarding the payroll deductions.

Commonly, any employee who performs services for the business (or “employer”) can be eligible to participate. The decision to participate is left exclusively up to the employee. 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.

Employees’ tax-deferred contributions are generally limited to a maximum annual calendar year contribution, for 2014 that maximum is $5,500.00. Additional “catch-up” contributions of currently $1,000.00 a year are permitted for employees age 50 or over, thus a total of $6,500.00 a year for 2014.

Example of time value of money

Saving $500.00 per month, for 20 years, at 6% annual return over that time will provide you $232,176.00 for retirement.  See the US government’s Tools and Calculators for Investors

The new Presidential myRA to be established by Treasury in 2014

The new myRA, to be established by Treasury under request of President Obama, is covered previously in this blog at > myRA <  Several blog subscribers have emailed me with policy and operational questions about the “myRA“.   A vein of questions that I find particularly interesting is whether tax policy rests with the executive instead of Congress?  The myRA has a tax benefit (tax exemption during the earnings period) and a cost (no fees to be passed onto the employee, but as the adage goes: “there is no free lunch”).  Tax Policy (tax imposition and tax benefit) should be established by Congress as part of the democratic process of establishing a fiscal budget.   Yet, this norm is not absolute because Congress handed over of both establishing and enforcing regulation to the Executive (Treasury in this case).  Establishing and enforcing the regulations also impacts policy.  If you care to comment directly in the blog, do so below or feel free to continue sending me your comments directly. 

2013_tf_insurance_emp_benefits_combo_covers-m_2Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts on Insurance & Employee Benefits delivers the latest guidance on:

  • Estate & Gift Tax Planning
  • Roth IRAs
  • HSAs
  • Capital Gains, Qualifying Dividends
  • Non-qualified Deferred Compensation Under IRC Section 409A
  • And much more!

Key updates for 2014:

  • Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
  • Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
  • Expanded coverage of Annuities
  • New section on Structured Settlements
  • New section on International Tax
  • More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
    • Life Insurance
    • Health Insurance
    • Estate and Gift Tax
    • Deferred Compensation
    • Individual Retirement Plans

Plus, you’re kept up-to-date with online supplements for critical developments.  Written and reviewed by practicing professionals who are subject matter experts in their respective topics, Tax Facts is the practical resource you can rely on.

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