Beginning January 1, 2003, employees will have a new saving option for retirement. The deemed IRA, created by the Economic Growth and Tax Relief Reconciliation Act of 2001, allows employees to contribute to IRA accounts as part of their overall investment in qualified employer plans, including 401(a), 401(k), ESOP, 403(a), 403(b), and 457(b) plans.

Plan sponsors welcome the new rules because more investment money will be added to the qualified plan pool. The deemed IRA rules allow for commingling of deemed IRA and qualified plan monies. Employees may find appeal in the ability to apply the same investment choices to all retirement funds.

Employers who agree to set up deemed IRAs for their employees must make participation voluntary, and both deductible and non-deductible contributions must be accepted. Also, deemed IRA contributions must be accounted for separately, and the account must meet all but the commingling requirements of a traditional or a Roth IRA.

Contributions rules for traditional and Roth IRAs apply to all contributions to deemed IRAs, so income thresholds and phase-outs must be taken into consideration when making contributions. The distribution rules for the deemed IRAs are the same as for normal traditional and Roth IRAs.

Interested employers should check with their plan sponsors to make sure the deemed IRA program is being offered and to acquire information that can be made available to employees.