PAYROLL DEDUCTION IRAs 

FOR SMALL BUSINESSES

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.

To view this and other EBSA publications, visit the agency’s website at: 
dol.gov/agencies/ebsa. 

To order publications or speak with a benefits advisor, contact EBSA  
electronically at: askebsa.dol.gov.

Or call toll free: 866–444–3272 
 
This material will be made available in alternative format  
to persons with disabilities upon request:   
Voice phone: (202) 693–8664 
TTY: (202) 501–3911 

This booklet constitutes a small en ti ty compliance guide for pur pos es of the 
Small Business Regulatory Enforcement Fairness Act of 1996.

Want to help your employees save for retirement but don’t 
want the responsibility of an employee benefit plan? Think 
about a payroll deduction IRA program.

A payroll deduction individual retirement account (IRA) is an easy way for businesses to give 
employees 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 to participate and if so, 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 covered by an employer retirement 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 contribute, and the investments can grow tax-deferred. If the individual selects a 
Roth IRA, the contributions are after-tax and the investments grow tax-free.

         PAYROLL DEDUCTION IRAS FOR SMALL BUSINESSES                                                  1

  Advantages of a payroll deduction IRA:

  n  The payroll deduction IRA is a simple way for employees to set up an IRA and save for 
   their retirement. 

  n  The employee makes all of the contributions. There are no employer contributions. By making 
   regular payroll deductions, employees are able to contribute smaller amounts to their IRAs each 
   pay period, rather than having to come up with a larger amount all at once. 

  n  Administrative costs are low and there are no annual filings with the government. 

  n  There is no requirement that an employer have a certain number of employees to set up a 
   payroll deduction IRA. 

  n  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. 

  n  Providing a payroll deduction IRA for employees may assist an employer in attracting and 
   retaining quality employees. 

  This booklet provides an overview of payroll deduction IRA programs and is not a legal 
  interpretation.

  Establishing a Payroll Deduction IRA

  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 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.

  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 requirements 
  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 about 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.

2 U.S. DEPARTMENT OF LABOR

The employer can:

n  Encourage its employees to save for retirement by providing general information about 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; 

n  Answer employees’ questions about the payroll deduction program and refer inquiries to the 
 IRA provider; and 

n  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 
employee contributions and promptly sending them to the IRA provider.

                                          PAYROLL DEDUCTION IRAS FOR SMALL BUSINESSES                3

  Operating a Payroll 
  Deduction IRA

  Generally, any employee who performs services 
  for the business (or “employer”) can be eligible to 
  participate. 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. Employees 
  are always 100 percent vested in (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 59½, there may also be a 
  10 percent additional tax.

  Employees’ contributions are limited to $5,500 
  for 2016 and for 2017 (see irs.gov/retirement 
  for annual updates). Additional “catch-up” 
  contributions are permitted for employees age 50 
  or over. This special catch-up amount is limited to 
  $1,000 per year.

  The employees control where their money is invested 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 are low because the program is not subject to the government filing, 
  administrative and fiduciary requirements imposed on employer retirement plans (such as 401(k) 
  plans).

  The employer may pay fees charged by the IRA provider 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.

4 U.S. DEPARTMENT OF LABOR

Terminating a Payroll Deduction IRA

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 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 websites:

dol.gov/agencies/ebsa – Go to the Saving Matters website at savingmatters.dol.gov or the “Small 
Business” section under “Employers & Advisers” for additional information to help you understand 
and operate your payroll deduction IRA. This website also has information to help your employees 
understand the importance of saving for retirement.

irs.gov/retirement – Go to “Choosing a retirement plan” to view plain-language information that will 
help you properly maintain your payroll deduction IRA. All the IRS forms and publications mentioned 
in this booklet are available here.

In addition, the following jointly developed publications are available on the DOL and IRS websites or 
can be ordered through the toll-free number listed below:

n Choosing a Retirement Solution for Your Small Business, Publication 3998, provides an 
  overview of retirement plans available to small businesses. 

n SEP Retirement Plans for Small Businesses, Publication 4333, describes a low-cost retirement 
  savings option for small businesses. 

n SIMPLE IRA Plans for Small Businesses, Publication 4334, describes a type of retirement plan 
  designed especially for small businesses. 

n Profit Sharing Plans for Small Businesses, Publication 4806, describes a flexible way for 
  businesses to help employees save for retirement.

n 401(k) Plans for Small Businesses, Publication 4222, provides detailed information about the 
  establishment and operation of a 401(k) plan. 

n Adding Automatic Enrollment to Your 401(k) Plan, Publication 4721, explains how to add 
  automatic enrollment to your existing 401(k) plan. 

n Automatic Enrollment 401(k) Plans for Small Businesses, Publication 4674, explains a type of 
  retirement plan that allows small businesses to increase plan participation. 

                                                         PAYROLL DEDUCTION IRAS FOR SMALL BUSINESSES    5

  For business owners with a plan
  n Retirement Plan Correction Programs, Publication 4224, briefly describes the IRS and DOL 
    voluntary correction programs. 

  Order electronically at askebsa.dol.gov or by calling 866-444-3272.

  Related materials available from DOL

  DOL sponsors an interactive website – the Small Business Retirement Savings Advisor, available at 
  http://webapps.dol.gov/elaws/ebsaplan.htm – that encourages small business owners to choose the 
  appropriate retirement plan for their businesses and provides resources on maintaining plans.

  For employees
  n Savings Fitness: A Guide to Your Money and Your Financial Future (also in Spanish) 

  n Taking the Mystery Out of Retirement Planning (also in Spanish) 

  n Top 10 Ways to Prepare for Retirement (also in Spanish) 

  n Women and Retirement Savings (also in Spanish) 

  To view these publications, go to dol.gov/agencies/ebsa and click on the “Small Business” section 
  under “Employers & Advisers.” To order publications or request assistance from a benefits advisor, 
  contact EBSA electronically at askebsa.dol.gov or call toll free 866-444-3272.

  Related materials available from the IRS

  Publications
  n Choose a Retirement Plan for Employees of Tax Exempt and Government Entities, Publication 
    4484 

  n Contributions to Individual Retirement Arrangements (IRAs), Publication 590-A 

  n Distributions from Individual Retirement Arrangements (IRAs), Publication 590-B

  n Lots of Benefits, Publication 4118 (also in Spanish, Vietnamese, Korean, Chinese and Russian) 

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

  To view these publications, go to irs.gov/retirement and click on “Retirement Plans A - Z” and then 
  “Forms & Publications.” 

6 U.S. DEPARTMENT OF LABOR

EMPLOYEE BENEFITS SECURITY ADMINISTRATION
UNITED STATES DEPARTMENT OF LABOR

Publication 4587  (Rev. 10-2016)  Catalog Number 49670A
Department of the Treasury  Internal Revenue Service  www.irs.gov