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The Benefits of A 401k Payroll Integration for Your Business

by John Stebbins on Sep 22, 2022 10:44:53 AM

If you currently offer a 401k to your employees or are thinking of adding one to your benefits package to improve recruiting and retention, you probably know there can be a lot of administration involved with these plans. One way to ease the burden on your staff is with payroll integration. With this approach, you’ll be able to increase efficiencies while also decreasing the likelihood of errors. What should you know about 401k payroll integration to decide if it’s something you should consider? We’ll break it down for you.

In this article, we’ll discuss what 401k payroll integration is, the difference between 180 and 360 degree integrations, the advantages, and any costs you may incur to ensure the automatic data flow between the payroll and 401k recordkeeping systems. After reading this, you’ll know the steps you need to take if you want to have 401k payroll integration at your company.

How does 401k payroll integration work?

At its most basic level, integration between your 401k plan and payroll simply means connecting payroll data to benefit providers or recordkeeping systems so that it flows seamlessly between them. That’s because your retirement plan system needs to know how much each employee is contributing as well as any match amount. Plus, it needs to maintain census data about workers such as their date of birth, address, date of hire, and more. And all of that comes from your payroll system.

There are generally 3 different approaches to payroll integration for your plan:

  • Self-Managed
  • 180 Degree Integration
  • 360 Degree Integration

Self-managed

With this way, every pay period, you’ll upload files and remit contributions directly to the recordkeeper using online tools. You’ll also add newly eligible employees to the plan and enter workers’ deferral changes into the payroll system. Handling the process yourself may be a good choice if you want more control over your data but because of the potential drawbacks of this manual process, many companies prefer automated integration, which we’ll discuss next.

180 degree integration

This type of arrangement allows for one-way communication, meaning,  the payroll provider transmits participant data to the recordkeeper in the format that it requires; however, you as the plan sponsor or your third party administrator is responsible for sending participant information and changes from the recordkeeper back to your payroll provider. 

360 degree integration

With this approach, both your payroll provider’s and recordkeeper’s systems communicate with each other via an API so information is transmitted back and forth and not just one way. That means, in addition to sending census and payroll data to the recordkeeper, the recordkeeper sends back changes to deferral information to your payroll system automatically.

What are the benefits of 401k payroll integration for my business?

No matter which of the two automated options you use, integrating your 401k plan administration with your payroll provider will streamline your process. The advantages of 180 or 360 degree integrations include:

  • Reduced administrative burdens: Processing employee contributions involves moving data from and between many systems. Manually tracking and updating deferrals each pay period can be time consuming. By automating the process, you’ll free up your team so they can focus more on growing your business.
  • Greater accuracy: Any time an employee makes a contribution rate request, you’ll need to track this change, enter the new deferral data, and adjust payroll – touching the information in your systems multiple times. With integration, these changes will be implemented automatically to reduce the risk of errors.
  • Synchronized employee census data: As a plan sponsor, you’ll need to complete year-end census and reporting, which your recordkeeper or third-party administrator will use for nondiscrimination testing to show that you’re not discriminating against lower-income workers in favor of owners or highly-compensated employees. When you have a new employee or termination, payroll integration can make sure this information is updated automatically.
  • Enhanced compliance: Since integration means contributions will be transmitted automatically, you’ll be able to ensure that they’re invested promptly so you’ll be in compliance with the requirement that they be deposited no later than 15 business days after the end of the month in which the contributions are deducted.

What does 401k payroll integration cost?

Depending on the type of integration you choose, you’ll likely need to pay extra for 401k payroll integration. For example, you may be charged a set-up fee for a 180 degree integration that can range from $50 to $100 plus a per payroll file integration cost that is typically somewhere between $15 and $35.

For a 360 degree integration, you’ll pay a bit more for the platform that links your two systems and pulls and pushes data. Specifically, you may be charged an initial set up fee that can range from $500 to $1,000 and a per employee per month fee of $.50 to $.80.

How to Best Integrate your 401k and Payroll Systems

As you can see, integrating payroll and your 401k can deliver significant benefits. Yet not all payroll providers will integrate with your retirement plan systems. Some only integrate if you have both your payroll and 401k plan administration with them while other payroll companies will try to accommodate you and establish a connection with the major providers to allow you more choice and flexibility. To be sure your systems will integrate, ask potential providers up front.

Likewise, not all recordkeepers may set up an integration. In some cases, it may depend on the value of your retirement plan assets. Again, it’s a good idea to find out when you’re evaluating 401k providers about the ability to link with your payroll. For help on other things to look for in your 401k provider, read our next article on the top 7 factors to consider when selecting a partner for your company’s retirement plan.

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