Setting Up Pre-Tax Deductions

You can use the PR Deductions/Liabilities form to set up deduction codes for any pre-tax salary reduction plans. Some examples of pre-tax salary reduction plans are 401(k) and cafeteria plans for U.S. users, and pre-tax union dues for Canadian users.

Setting up Pre-Tax Deductions

Setting up pre-tax deduction codes is very similar to creating a standard deduction code, but there are a few differences in how you implement them in the system.

To set up pre-tax deductions:

  1. Create a pre-tax deduction group in PR Pre-Tax Deduction Groups, and set the Standard Annual Contribution Limit in that form.

    Since pre-tax groups are also used for 401(k) catch up contribution limits and for 401 employer match limits, you should set those limits as well.

  2. Create a deduction code in PR Deductions/Liabilities for the pre-tax deduction. In particular, keep these steps in mind:
    1. Keep pre-tax deductions separate from other deductions.
    2. Set the Calculation Category to E-Employee.
    3. Set the Method field to A-Amount or G-Rate of gross.
    4. Do not enter an amount in the Amount field in the Limit section. The limit for this deduction code is determined by the pre- tax group set in step 2f.
    5. Select the Pre-Tax Deduction check box.
    6. In the Pre-Tax Group field, enter the group number that was created for Step 1. When multiple 401(k) deductions require a combined annual limit, use the same pre-tax group for all.
  3. Assign the pre-tax deduction code to the calculation basis for all applicable deduction codes. By assigning pre-tax deductions to the Basis Codes tab in PR Deductions/Liabilities, you ensure that the pre-tax deduction is not included in calculating the basis of the standard deduction code.
  4. Associate the pre-tax deduction code with all applicable earnings codes in PR Earnings Codes.
    Note: You must associate pre-tax deductions with earnings codes to ensure the system processes payroll correctly.
Setting Up Catch-Up Deductions

If you have employees who are 50 or older and want to make catch-up contributions to their pre-tax deductions (for example, 401(k) or Roth plans in the United States), you will need to create an additional deduction code for the catch-up limit.

To set up catch-up pre-tax deductions:

  1. Confirm that at least one pre-tax deduction code exists. If not, follow the steps in the Setting up Pre-Tax Deductions section above to set one up.
  2. Create an additional deduction code for the catch-up contributions. Keep these steps in mind:
    1. Set the Calculation Category to E-Employee.
    2. Set the Method field to A-Amount or G-Rate of gross.
    3. Set the limit type (in the Limit section) to Calculated Amount and set the Applied field to Annually.
      Do not enter an amount in the Amount field. The annual limit for catch up deductions is defined in PR Pre-Tax Deduction Groups for the specified pre-tax group.
    4. Select the Pre-Tax Deduction check box.
    5. Select the Catch up Deduction check box.
    6. In the Pre-Tax Group field, enter the same group number that was entered in Step 2f of the Setting up Pre-Tax Deductions section above. This will ensure that the catch-up deduction code and its related pre-tax deduction code are in the same pre-tax group.
  3. Assign the pre-tax deduction codes to the calculation basis for all applicable deduction codes. By assigning pre-tax deductions to the Basis Codes tab in PR Deductions/Liabilities, you ensure that the pre-tax deduction is not included in calculating the basis of the standard deduction code.
  4. Associate the pre-tax deduction codes with all applicable earnings codes in PR Earnings Codes.
    Note: You must associate pre-tax deductions with earnings codes to ensure the system processes payroll correctly.
    When the system processes the codes, it will apply contributions to the regular 401(k) deduction and ignore the catch-up contribution amounts until the limit for the regular contribution is met. At that point, the system will ignore the regular deduction code and apply contributions to the limit for the catch-up deduction.
You may want to verify that the catch-up deduction amount is correct on the paycheck that includes both the last regular 401(k) deduction and the first 401(k) catch-up deduction. For more information, see Verifying 401(k) Deduction and 401(k) Catch-up Deduction Amounts.