What is a Payroll Deduction Authorization Form?
What is a Payroll Deduction Authorization Form? In simple terms, it is a form that gives an employer the authorization to withhold certain amounts from an employee’s paycheck. The purpose may be for overpayment of wages, wage garnishments, tax lien levies, or other miscellaneous purposes (such as donations to charities). It is common for employers to withhold amounts from an employee’s paycheck for employee contributions in a pension plan.
Payroll deduction authorization forms are important to both employers and employees . For employers, it is important to ensure that payroll deductions are necessary, legal, and consistent with company policy. Overdeds, for example, can have serious legal consequences for the employer. The Fair Labor Standards Act (FLSA) prohibits employers from requiring certain deductions from employees’ paychecks. Both employers and employees should understand what rights employees have under FLSA, since some deductions may be prohibited.
The Essential Elements of the Form
The following key components should be found on any formal payroll deduction authorization form:
Employee Information
Every payroll deduction authorization form should contain a section detailing the employee’s name, address and Social Security number. For easy identification, include a company employee ID number, if applicable. This basic employee information is essential for matching the secured debt to the employee’s paycheck.
Deductions
The form must identify the creditor, the specific amount that will be deducted from each paycheck and the date(s) on which the deduction will occur. Be as specific as possible, whether you are liquidating perishable goods, collecting on a loan or teasing out the debt from failed consumer purchase plans. This is particularly important in the context of a non-judicial garnishment, which typically does not list the specific amount of the judgment or per transaction deductions. Unspecified deductions render the "indebted money" meaningless to the employee, who then has nothing for which to account when questioned by the employer.
Terms of Agreement
The terms of agreement section provides the necessary consent and information for the employer and creditor to establish a legally enforceable payment/compensation plan. Be sure to include the names of all parties entering the agreement; the method of collection; the obligations and liability of all parties; a waiver of all claims in the event a breach occurs; and a section requiring the creditors to advise the employee before they change their employment. This section may also require the employee to continue making the agreed upon payments to the creditor while the creditor is seeking a judgment.
Common Scenarios for Payroll Deductions
Payroll deductions allow employers to take part of an employee’s salary and pay for things that the employee has agreed upon. Payroll deductions help the employee by not having to manually pay the medical insurance premium, retirement contribution, or loan payment every month. It helps the employer by making it easier to keep up with the payments and by keeping the funds out of the employee’s account when they should not be there.
The money deducted from the employee’s wages is sent to the proper place to pay for the item the employee agreed to purchase. For example, if the employee agreed to have money deducted from their paycheck to pay for their health insurance premium, this money is sent directly to the health insurance company. If the employee agreed to have money deducted to pay off a loan, the money is sent directly to the lender. If the money is being deducted to contribute to a retirement account, such as a 401k plan, the money is being deducted and sent directly to the retirement account.
Health insurance premiums are very common payroll deductions. The employee provides the employer with a completed payroll deduction authorization form authorizing the employer to deduct the premium from the employee’s paycheck. The amount deducted from the paycheck would be the employee’s share of the premium. The employer sends the deducted funds to the health insurance company to pay for the premium. Another common payroll deduction is life insurance premiums. This form is usually very similar to the payroll deduction form for a health insurance premium. There may be a separate form for the employee to sign indicating how much life insurance they are purchasing.
Retirement plan contributions are also common. Withholdings for a 401(k) plan are usually payroll deductions. Every pay period, the employer would deduct the pre-tax contribution amount which has been authorized by the employee. Some employers match the employee’s contributions up to a certain percentage. The contribution, along with the employer match, is mailed directly to the 401(k) plan. Disability insurance is another deduction that may be authorized.
Legal Guidelines and Obligations
Payroll deductions are subject to a patchwork of state and federal regulations that vary widely depending on the industry, type of deduction, and jurisdiction. On both the federal and state levels, certain deductions require both employee authorization and compliance with specific requirements. Wage garnishments, for example, are a court-ordered requirement whereas health insurance premiums, retirement contributions, and flexible spending plan deductions must comply with the Employee Retirement Income Security Act ("ERISA"). However, there is no blanket consent requirement under ERISA for all such deductions, like under the Fair Labor Standards Act.
Furthermore, employers must comply with a number of requirements when making deductions from an employees’ wages. For example, under the Fair Labor Standards Act, an employer must provide an employee with an accounting of the deductions. The Fair Labor Standards Act also sets limits on wage deductions for advances, loans, or the repair of tools necessary for employment (often limited to one-quarter of an employee’s disposable earnings). An employer also cannot take a deduction from an exempt employee’s salary for partial day absences. State laws may also restrict deductions from wages for absences for vacation, approved sick leave, temporary military leave, and jury duty.
Despite the legal requirements relating to payroll wage deductions, the overriding requirement is that an employer have their employees’ consent, in the form of a completed and signed payroll deduction authorization form, before implementing payroll deductions from employee wages.
Devising an Effective Form
When creating an effective payroll deduction authorization form, it is essential to be as clear and simple as possible. Ambiguous language or unclear explanations may lead to confusion or misunderstandings, which can in turn result in disputes or litigation. Any other verbiage included in the form should be succinct and to the point, with no unnecessary filler language that would serve only the purpose of making the form longer than needed. It is also helpful to include in an area of the form general information intended for the workers themselves; this information should not be anything confidential and should not contain any proprietary information. It may include things like:
- When payroll deductions will be taken out of paychecks.
- What the amount being removed from paychecks will be used for. For example, if it is health insurance premiums, how much those premiums will be and any other relevant information.
- Information about how the program works in general. For example, if payments to a program are "attached" to the employee, so that they remain required even if the employee is terminated, be sure to include information to that effect on the form. Otherwise, an employee may be under the mistaken impression that such payments will automatically cease upon their termination or resignation.
- Something relating to the program that shows the employee can have personal responsibility over their account. For example , if an employee contributes to a 401(k) retirement plan, the form can show that the employee can make decisions about what to invest in. If this is not included, an employee might feel somewhat helpless and reliant on someone else’s judgement when it comes to receiving information about their account.
In general, the most helpful approach regarding the above is to have a small box at the top of the form that advises payments are "for your information only," and if the employee has any questions regarding the form, they can reach out to "X [Relevant Person]." This gives the employee someone to speak to directly if they don’t fully understand the form at hand, or have additional questions that they feel should not be covered by the current form.
Additionally, the form should not contain information that is too confidential to be general knowledge. This would include simply confirming an employee is being paid by a given company or not being paid by a given company. More confidential information, including pay rates, should not be on the form.
As far as the format goes, this section should be written in a slightly smaller font than the actual authorizing language itself.
Addressing Changes and Withdrawals
After completing the tasks discussed above, the payroll department must consider any changes in authorization of withholding by employees who continue to work for the employer. In many states, the employees complete and submit new authorization forms to the employer, and the employer will maintain these forms on file until it receives a revocation.
On revocations, an employer must stop withholding on the last pay date that the employee should participate in the benefits and implement the change the next pay date that the employee is eligible.
Employers who mistakenly withhold on employees who have revoked, or fail to withhold after an employee requests a change in payroll deductions and benefits, may be subject to penalties and interest by the state for improper withholding. Generally, the employee may also be entitled to a refund and/or court sanction if the error was not corrected and the employee’s rights were violated. Processing of deductions and withholdings may also be affected by other factors. Employers may experience unexpected terminations of employment and layoffs (especially in the current economy), all of which may cause the payroll department to cease or change authorizations. On the other hand, an employee exercising his/her right to change participation status in any of the benefit programs or deductions may have an effect on the payroll process. In addition, the employer may choose during most annual open enrollment periods to change certain types of benefits and their costs as well.
Payroll Deduction Authorization FAQs
Below are some frequently asked questions and answers relating to payroll deduction authorizations.
What Information is on the Payroll Deduction Authorization Form? We guide customers on what information is required for the form to be effective. The most important pieces of information that must be on the form include: the employee’s full name, social security number, and a clear statement that payroll deduction may occur for a specific purpose.
What if One Payroll Deduction Authorization is Used for Multiple Purposes? A payroll deduction authorization form can allow for multiple payroll deductions for various purposes . It’s not limited to just one purpose.
How Often Can Payroll Deductions Occur? Payroll deductions can occur every payroll period; we have not found legal restrictions on the timing of the payroll deduction.
How Does a Company or Organization Monitor Payroll Deductions? Each payroll period, the company/organization will receive a report from the payroll processor of the amount of the payroll deductions.
Do Payroll Deductions Create Contributing Member Status? In most cases, yes; however, a payroll deduction is not considered a contribution until it is received by the company/organization.