Payroll deduction IRA

What a payroll deduction IRA is

The employee opens an IRA with a financial institution and authorizes a deduction from each paycheck. The employer’s only job is to send the money on. Under Department of Labor rules the arrangement stays outside ERISA when participation is completely voluntary, the employer makes no contributions, does not endorse the program, and receives nothing beyond reasonable compensation for its payroll services.

Why it matters to employers

It is the lightest way to offer retirement saving: no plan document, no Form 5500 and no testing. The trade-offs are the IRA limit and the fact that the employer cannot contribute. State auto-IRA programs are built on the same payroll deduction model, with enrollment made automatic by state law.

Example with 2026 figures

An employee asks to save $200 from each of 26 paychecks, or $5,200 a year. That fits within the 2026 IRA limit of $7,500 ($8,600 at 50 or older). In a 401(k) the same employee could defer up to $24,500 and might also receive an employer match.

Common mistakes

• Holding deductions before sending them. IRS and Department of Labor guidance expects the employer to pass contributions to the IRA provider promptly.

• Endorsing a provider or negotiating special terms in a way that turns the arrangement into an employer plan.

• Assuming it satisfies a state mandate. State laws generally exempt employers that sponsor a qualified plan such as a 401(k), so check your state’s rule.