Payroll Deduction IRAs

An option for churches with no retirement plan.

IRS Announcement 99-2

Some ministers and lay church staff members are not eligible to participate in a church or denominational pension plan. This may be because the employing church has never established such a plan, and is not affiliated with a denomination that has done so. Perhaps your church does not offer a retirement plan to staff members, and no denominational plan is available, but you would like to do something to assist with retirement savings. A number of options are available. One was the subject of a recent IRS announcement—a payroll deduction IRA.

In the Conference Report to the Taxpayer Relief Act of 1997, Congress indicated that “employers that choose not to sponsor a retirement plan should be encouraged to set up a payroll deduction system to help employees save for retirement by making payroll deduction contributions to their IRAs.” Congress encouraged the IRS to “continue its efforts to publicize the availability of these payroll deduction IRAs.”

The IRS responded in a recent announcement in which it reminded employers “that are not currently in a position to sponsor a retirement plan” that

the introduction of Roth IRAs in 1998 presents an additional opportunity to facilitate employee retirement savings. As with traditional IRAs, amounts accumulated under Roth IRAs are exempt from federal income tax, and contributions to Roth IRAs are subject to specific limitations. Unlike traditional IRAs, Roth IRA contributions cannot be deducted from gross income, but qualified distributions from Roth IRAs are excludable from gross income ….

The IRS further informed employers that they can allow employees to contribute to traditional or Roth IRAs by direct deposit though payroll deduction. In addition, the IRS noted that employees making direct deposits of deductible contributions to traditional IRAs may be able to adjust their federal income tax withholding on account of these contributions. By adjusting their withholding, employees may not have to wait until they file their tax return to get the benefit of the tax deduction for their contributions. Employees can review the instructions on IRS Form W-4 (Employee’s Withholding Allowance Certificate) and the worksheet on the back of that form to see if they are eligible for this withholding adjustment.

The IRS concluded: “Many employers permit their employees to directly deposit all or a portion of their paychecks into checking or savings accounts maintained by financial institutions. Employers may also assist their employees in saving for retirement by means of direct deposit through payroll deduction to IRAs.”

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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