401(k) Payroll Integration: The Basics
Having the right payroll provider can make all the difference. Finding a partner that provides a transparent, cost-effective solution that saves time, resources, and keeps your company in compliance is one of the most important considerations when hiring service providers for your 401(k) plan.
Working with a provider that cannot fully integrate their system with that of your recordkeeper can lead to decreased productivity and costly mistakes. Payroll integration is the answer and comes in two forms: 180-degree (180o) and 360-degree (360o).
180o vs. 360o Integration
180o and 360o payroll integration connect payroll data to the back-end system of your 401(k) plan’s recordkeeper. 180o payroll connections are one-way and send employee plan contribution data to a recordkeeper’s system. 360o integrations are two-way systems, introducing a mechanism to send employee elections back to the payroll system.
180o integrations tell the recordkeeper how much each employee contributes toward a plan for each payroll cycle. It is essential that a payroll provider gets the timing of these contributions right and that the payroll amounts are accurate. It’s easy for human error to occur, especially when there are many employees to process data for. A simple mistake in recording plan contributions can lead to major problems in the form of over or under-contributions. Unchecked, this can go on for many pay periods, leading to costly corrections once the issue is resolved.
Similar to 180o integration, 360o integration sends payroll data from the payroll system to the recordkeeper. But unlike 180o integration, 360o also sends data back to the payroll system. Without it, contribution changes made on the recordkeeper’s system would require another manual step to be captured in time for the next payroll run.
For example, an employee may choose to reduce their 401(k) contribution by 4 percent and want that change to be effective immediately. Instead of notifying the payroll department or logging into the app for the company’s payroll provider, they make the change on the recordkeeper’s system. Without a 360o integration, an HR employee must receive an alert from the recordkeeper or run a report and then log into the payroll system and record the change manually. Again, failing to record this change accurately and on time can lead to costly issues for the employer.
Why Does 401(k) Payroll Integration Matter?
- Simplifies data collection: Instead of wasting time with the collection of salary, hours, termination dates, and other census information needed to complete your year-end compliance requirements, integrated sharing of this data between your 401(k) and payroll system improves efficiency.
- Reduces the plan sponsor’s responsibility: Minimize administrative responsibility and duplicative data-entry by seamless electronic data transfer of census information between the systems of your plan’s recordkeeper and the company’s payroll vendor.
- Ensures compliance: Legal and fiduciary compliance is easier to maintain with proper and timely transmission of 401(k) contributions for their employees.
The largest payroll companies also offer 401(k) recordkeeping services. They will argue that one company doing everything provides for more efficient integration. Intuitively, this makes sense, but in practice we have found that it does not work well for our clients.
Working with recordkeepers that do not offer payroll but have proactively invested in their systems to integrate with a wide range of different payroll providers is typically the best solution for our clients. Ultimately, finding a payroll company that provides full integration at no or little additional cost is essential in today’s marketplace.
While the largest payroll companies may not be the answer, several sophisticated payroll companies offer transparent pricing and additional value-add services that have served our retirement plan clients well.
Safeguard your business and empower your employees. Reach out to our team of 401(k) retirement plan advisors.