What Is a Payroll Deduction Plan?

A payroll deduction plan refers to when an employer withholds money from an employee's paycheck for a variety of purposes, but most commonly for benefits. Payroll deduction plans may be voluntary or involuntary. One common example of an involuntary payroll deduction plan is when an employer is required by law to withhold money for Social Security and Medicare. A voluntary payroll deduction plan happens when an employee opts for — and gives written permission to — an employer to withhold money for certain purposes, such as a retirement savings plan, healthcare, or life insurance premiums, among others.

Payroll Deduction Plan Explained

Payroll deduction plans offer employees a convenient way to automatically contribute income toward an ongoing expense or investment. For example, it is common for employees to deduct a set percentage of income and contribute it to their traditional Individual Retirement Account (IRA) or Roth IRAs. An employee may also choose to have the premiums from an insurance policy deducted from their pay, ensuring that payment is never missed.

Some payroll deduction plans may also involve the voluntary, systematic payroll deductions to purchase shares of common stock. In such cases, the employee opts into their employer's stock purchase plan and a portion each paycheck goes to buying shares of their employer's stock, generally at a discounted price. In an example provided by the Securities and Exchange Commission (SEC) regarding the Employee Stock payroll Deduction Plan at Domino's Pizza, Inc., eligible employees may opt to allocated 1-15% of their paycheck to buying company stock priced at 85% of fair market value of the date the option is exercised.

Payroll Deduction Plan Examples

Some common voluntary payroll deduction plan examples include:

  • 401(k) plan, IRA, or other retirement savings plan contributions
  • Medical, dental or vision health insurance plans
  • Flexible spending account or pre-tax health savings account contributions
  • Life insurance premiums (often sponsored by the employer)
  • Charitable to employer-sponsored charitable giving plans
  • Short-term disability insurance plans
  • Payment for job-specific items, such as clothing, uniforms or tools
  • Union dues
  • U.S. Savings Bond purchases
  • Payments for purchases of company merchandise (computers or other retired equipment)
  • Tuition or professional certification fee deductions

Some common involuntary payroll deduction plan examples include:

  • Federal income tax withholding (federally mandated)
  • FICA taxes (for Social Security and Medicare contributions and premiums)
  • State income tax withholding (mandated by states that impose a tax on income)
  • Local taxes (imposed by cities, counties, and towns for disability and/or unemployment insurance)
  • Child support payments (when ordered by a court)