Employer payroll deduction IRAs are coming back into vogue, an expert told the recent NTSA summit during a Feb. 7 session.
“Employer IRAs are not new; they are experiencing a resurgence due to MEP and PEP rules,” said Sue Diehl, president of PenServ. Employer IRAs are “completely open to employers however they wish to use them,” she said.
Diehl described some of the details about them and how they work.
how they work
In an IRA payroll deduction, an employee sets up an IRA (either a traditional IRA or a Roth IRA) with a financial institution.
Eligibility. Any employee who performs services for an employer is eligible to be included in an IRA payroll deduction. In general, if an employer offers such an arrangement to one employee, it should offer it to all employees.
The role of the employer. Payroll IRAs aren’t a heavy hitter for employers, Diehl said. Once an employee has established one, the employer is responsible for passing on the employee’s authorized deduction to the financial institution. But after that:
- There is no filing or annual report requirement.
- The employee’s W-2 form will not reflect contributions and will indicate that the employee is not participating in a retirement plan.
- No separate statement should be provided to employees.
Submissions. The contribution rules are as follows:
- Employees fund their own payroll IRAs through payroll deductions.
- Contributions to each employee’s account are limited to the IRA contribution limit – for 2022, it’s $6,000 (plus $1,000 if age 50 and over).
- IRA contributions withheld at source are sent to each financial institution; employers are no longer responsible for the amounts assessed.
Investments. Each employee can move their IRA assets from one IRA to another; the selected financial institutions manage the funds.
Acquisition. Each employee is always 100% invested in contributions to their IRA payroll deduction.
Diehl has identified nine compliance areas of concern for trustees, custodians and issuers:
1. Plan document or agreement (custodian/trust agreement or IRA annuity)
2. Plan Disclosure Statement
3. Changes to Plan or Disclosure
4. Forms 1099-R
5. Forms 5498
6. Declarations of fair market value
7. Required Minimum Distribution Statements
8. Responsibilities, notice and elections
9. Compliance with the Securities and Exchange Commission’s fiduciary rule when finalized, as well as certain state rules
“You’ll learn more about employer IRAs,” Diehl told attendees.
Reputable IRAs have become increasingly popular, Diehl told attendees. With a deemed IRA:
- Contributions can be made to a qualified, 403(b), or government 457(b) plan under the same rules that apply to traditional or Roth IRAs, as long as the employer allows it.
- Employer must maintain separate account records and report in the same manner as they do for IRAs [Forms 1099-R (separate) and 5498].
- SEP or SIMPLE contributions cannot be made, as of 2003 per EGTRAA and IRS guidelines in Tax Procedure 2003-13 and Treas. Reg. §1.408(q)-1.
- A separate trust is not required, but separate accounting is required for the deemed portion of the IRA, with traditional and Roth accounts maintained separately.
- The trustee must be a bank.
- Government entities can become IRS-approved non-bank trustees for their own 457 and QP plans. “That means you’ll see them in flyovers,” Diehl said, adding that “some have already.”
- Disqualification issues may not spill over into the IRA portion or plan portion if separate trusts are maintained.
- Each portion may have a different eligibility.
- It is treated as a separate entity from the other parts of the plan for purposes of Code Sections 401(a)(9) and 72
- IRA rules apply to the deemed portion of the IRA and 403(b) rules apply to other sources of funds.
Reputable IRAs will help prevent leaks, Diehl said, if employees can transfer the funds after termination into a reputable IRA. And they can be used as an IRA for missing participants.