Salary Reductions are an agreement between employee and employer to reduce Employee’s salary and direct the amount reduced to the investment account that the employee has established on a pre-tax basis. In general, salary reductions lower the employee’s current-year Adjusted Gross Income (AGI) thus lowering their effective taxation for that year.
The salary reduction agreement is legally binding and irrevocable with respect to the salary earned while agreement is in effect, the agreement can be modified or terminated at any time by the employee. Before agreeing to withhold from your pay, and to avoid any misunderstanding, your employer will require you to complete a Salary Reduction Agreement. This agreement will specify the amount, frequency, purpose and in the case of investing the destination of the withholding.