The advantages of integrating payroll with 401(k) plans

LAST REVIEWED Jun 03 2021 7 MIN READ

By The Human Interest Team

Payroll is an underpinning of any small or medium-sized business. It's one of the first processes that small businesses set up after hiring their first employee. It’s also a central component of employer-sponsored retirement plans like a 401(k) or Roth 401(k).

Administering a 401(k) is a multistep process that hinges on payroll deductions. But there’s a lot at play behind the scenes. In employer-sponsored retirement plans, investments come from employee paychecks, an employer match, or profit-sharing. Employee contributions must be deducted and placed into their individual 401(k) accounts each payroll cycle. This involves: 

  • Tracking employee eligibility

  • Enrolling and communicating with employees

  • Keeping records of employee and employer contributions

  • Calculating and depositing employee contributions

  • Reporting payroll data each pay period

Businesses must also stay in compliance with federal regulations. Sound like a lot of work? It is. Unless you have payroll integration. Payroll integration helps automate the 401(k) administrative process by connecting payroll data to benefit providers or recordkeeping systems. Through automated administration and compliance monitoring, it can help small businesses offer retirement benefits to their employees—all while saving time and money in the process.

Does your 401(k) integrate with payroll?

Traditionally, many 401(k) processes have been handled manually. This has led to a fragmented, tedious process for plan sponsors (the entity responsible for establishing and overseeing the retirement plan for a company and its employees). 

This is where payroll integration helps. So, what’s the difference between an integrated 401(k) plan and one that offers partial (or zero) integration with payroll providers? Hours of your time in manual work. An integrated plan eliminates many burdens of managing a retirement benefit. And it can provide businesses better accuracy and reliability and free up precious resources. 

Learn how integrating your payroll process with 401(k) administration can help plan sponsors save time and reduce administrative headaches. 

The Advantages of Payroll Integration with a 401(k) Plan

1. Easier to maintain your payroll journal

Payroll is the process of paying your employees. With many 401(k) providers, employers are required to provide payroll files to a recordkeeping system and ensure that contributions are deducted accurately for each employee each cycle. 

This information is then logged in either a payroll journal or payroll register, which acts as the record or checkbook register of each payroll process. This process typically requires plan sponsors to manually upload payroll files to their recordkeeping system and complete a payroll journal for each pay period. 

Integrating 401(k) plan administration with your payroll provider helps streamline the entire payroll process. By relying on technology to maintain your payroll, you can reduce administrative burdens and ensure that employee contribution changes are automatically and accurately applied to your payroll process. 

2. Seamlessly synchronizes your employee census data

Businesses track employee eligibility and plan entry dates through their employee census. An employee census is a 401(k) administrative document that includes: 

  • Personal information (date of birth, address, name, and Social Security Number), 

  • Employment information (compensation, eligibility date, employee status, and hire date) 

  • Contribution information (employee deferral amounts) 

Companies must complete year-end census and reporting by submitting census data to their plan’s recordkeeper, who uses this data to perform non-discrimination testing. Because employee information changes frequently, census is an ongoing process. 

With many 401(k) providers, plan sponsors are required to send new hires plan documentation and set them up with their recordkeeper. And when employees exit the company, plan sponsors must send distribution paperwork, approve any withdrawals, update eligibility, and manage the plan exit.

Payroll integration can help automate the 401(k) process by reconciling your employee data. By syncing your census, payroll integration helps ensure your plan is up-to-date and compliant and that your employees receive the right information regarding plan details.

3. Automatically processes employee contributions

A 401(k) plan is a defined-contribution plan, meaning employees contribute a portion of their wages—either a specified dollar amount or percentage of a paycheck—to their account. 

While processing employee contributions may seem straightforward, there’s data moving from multiple systems. In many plans, participants can make deferral rate change requests at any time. Employers must track these requests, which generally requires them to manually enter deferral data, adjust payroll, and make necessary updates in their payroll system.

Manually tracking and updating deferrals each pay period can be tedious. Traditionally, the onus is on the plan sponsor to ensure employee and employer deductions are set up properly, including any employer match, profit sharing, and more. 

By integrating payroll with 401(k) plan administration, payroll deductions are automatically set up and updated. When employees sign up or change contribution rates, deductions are automatically updated in your payroll systems.

Hiring a 3(16) fiduciary can streamline payroll and other tasks.

A 3(16) fiduciary is a service provider hired by an employer to function as a plan administrator for your 401(k) plan. Many employers—especially small and medium-sized businesses—find it advantageous to hire a 3(16) fiduciary. 3(16) plan fiduciaries can provide the following benefits:

  • Delegate specific plan responsibilities

  • Limit an employer’s fiduciary responsibility

  • Reduce the administrative burdens of operating a plan 

Hiring a 3(16) fiduciary to function as your plan administrator can help streamline the 401(k) process and keep your plan in compliance with ERISA guidelines. From filing paperwork with government agencies to maintaining communications between employees and service providers, 3(16) fiduciaries provide ongoing support to help plans stay compliant. All while fulfilling a comprehensive set of duties that many plan sponsors find demanding.

Considering starting a 401(k) or 403(b) plan? 

It’s important to consider how your plan communicates with your payroll provider. Combining 3(16) fiduciary and payroll integration with a payroll provider helps automate the entire 401(k) process. At Human Interest, we integrate with more than 100 leading payroll providers. This helps us ensure updates to an employee’s contribution rate are automatically applied to your account. We deduct contributions and invest them in your employees’ 401(k) accounts. 

Contact us today to learn how you can save time and administrative headaches by integrating your 401(k) plan and your payroll process.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.