Definition
A Payroll Savings Plan (PSP) is an arrangement between an employer and an employee where a predetermined amount of the employee’s paycheck is automatically deducted and invested into various financial instruments such as stocks, bonds, or other investments. This deduction typically does not affect the taxability of the employee’s full salary, although deductions are allowed for contributions to qualified pension plans.
Examples
- Employer-Sponsored 401(k): An employee decides to contribute 5% of their pre-tax salary to their employer’s 401(k) plan, which is invested in mutual funds.
- Employee Stock Purchase Plan (ESPP): An employee opts to have a portion of their salary deducted to purchase company stock at a discount.
- US Savings Bonds: An employee enrolls in a program where a fixed amount is deducted from their paycheck and used to purchase U.S. Savings Bonds.
- College Savings Plan: An arrangement where deductions are taken from an employee’s salary to fund a 529 plan for their child’s future college expenses.
Frequently Asked Questions
What is a Payroll Savings Plan?
A Payroll Savings Plan is a financial arrangement where an employer regularly deducts a specified amount from an employee’s paycheck to be invested in various financial products.
Are contributions to Payroll Savings Plans tax-deductible?
Employee contributions to qualified pension plans via payroll deductions are tax-deductible. However, contributions to other plans, like stock purchase plans or bonds, may still be subject to taxation as part of the employee’s gross income.
How does a Payroll Savings Plan benefit employees?
Employees benefit from automated savings, reduced taxable income for qualified plans, and potential employer-matching contributions, all while systematically investing for future financial goals.
Can an employee change the contribution amount in a Payroll Savings Plan?
Yes, most plans allow employees to change their contribution amounts, subject to plan-specific guidelines and funding schedules.
What happens to the Payroll Savings Plan if an employee leaves the company?
If the employee leaves, they may roll over retirement plan savings to another qualified plan or withdraw other investments as per the plan’s regulations.
Is employer matching common in Payroll Savings Plans?
Employer matching is common in retirement plans like 401(k)s, providing added incentive for employee participation.
Related Terms
Defined Contribution Plan
A type of retirement plan where the employee and/or employer make regular contributions, with the future benefit based on the plan’s investment performance.
Employee Stock Ownership Plan (ESOP)
A program giving employees ownership interest in the company through stock allocation, often linked with Payroll Savings Plans.
401(k) Plan
A defined contribution plan offering pre-tax and possibly post-tax salary deferrals, often part of a broader Payroll Savings mechanism.
Pension Plan
A retirement plan that requires an employer to make contributions into a pool of funds set aside for an employee’s future benefit.
Employee Benefits
Various types of non-wage compensation provided to employees in addition to their normal wages or salaries, including Payroll Savings Plans.
Online References
- Internal Revenue Service (IRS) - Retirement Topics - 401(k) Plans
- U.S. Department of Labor - Understanding Retirement Plans
- Investopedia - Payroll Savings Plans
Suggested Books for Further Studies
- “The Simple Path to Wealth” by JL Collins
- “Bogleheads’ Guide to Retirement Planning” by Taylor Larimore et al.
- “The Intelligent Investor” by Benjamin Graham
Fundamentals of Payroll Savings Plan: Finance Basics Quiz
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