<i>Dear Workforce</i> What Is The Order For Payroll Deduction Items

March 4, 2001
QDear Workforce:

    We recently hadan employee who earned a small paycheck but not all her benefit deductions weretaken. Our payroll vendor automatically deducts benefits in alphabetical orderof their code. I was somewhat surprised by this as I had presumed that certaindeductions came first.

    But I have beenunable to find any information that details whether deductions are required tobe taken in a certain order. In other words, is there something that guides theorder in which deductions are made: i.e, 401(k) first, then health insurancepremiums, then flex, then parking, etc?

- Kim, HR Manager, Bank, Fargo, N.D.

Dear Kim:

    As curious as theymay seem, there are standardized federal guidelines, stipulated by the InternalRevenue Service (IRS) and the U.S. Department of Labor, which payroll entitiesmust follow. In your case, however, the deduction of "benefits inalphabetical order" is a protocol set by an individual payroll entity.

    It should be notedthat the federal guidelines were developed with the objective of serving theemployee's best interest. In basic terms, the deductions must be taken in thefollowing order.

  • FICA: The FICA deduction of 7.65percent is subtracted from the gross salary to ensure that the largestpossible contribution is made toward the Social Security and MedicareBenefit, to best prepare the employee for retirement.

  • 401(k): By deducting the 401(k)contribution pre-tax, it is more of an incentive for the employee toparticipate. And like the FICA deduction, 401(k) is a percentage of the(remaining) gross - minus only the FICA deduction.

  • Section 125 Benefits: These are thelast of the benefits deducted pre-tax - again as an incentive to boostparticipation. Premiums for these programs take priority over contributionsto Flexible Spending Accounts.

  • Federal Taxes: The IRS requires thatFederal tax deductions precede state tax deductions.

  • State Taxes: These only apply tothose states that have an income tax mandate.

  • Garnishments: Should their be agarnishment of wages, on a federal or state level, it will be taken aftertaxes and before any other benefit contributions

  • Miscellaneous benefits: Ifapplicable, this is where the alphabetical system may apply. Again, althoughthere is no formal protocol, many payroll companies choose to alphabetizethe remaining deductions for organizational purposes. Another option may beto sort the deductions from highest to lowest. Some typical deductions inthis group include 401(k) loans, life insurance premiums, STD/LTD and, amongothers, parking.

SOURCE: Mike Parker, BenchmarkHR, Salem, N.H., Jan. 31, 2001.

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