Key Considerations for Plan Sponsors When Changing Payroll Systems
Maybe you’ve determined that the client service does not meet your business needs, or you’ve noticed errors in your payroll processing. Maybe you’ve determined that a different payroll system would be more affordable to the business. Switching your payroll system can be a great opportunity to improve efficiency and reduce costs. Whether you’re looking for better service, fewer errors, or more affordable options, it’s important to consider how this change will affect your employee benefit plan.
Preparation is Key
As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.” Connect with your current plan service provider to discuss the planned payroll system change. They can help identify potential issues and suggest integration solutions between payroll and your employee benefit plan provider that may not have been previously available. Proper integration can minimize data entry errors and streamline your payroll processes.
Timing the Change
While payroll system changes can occur at any time, aligning the transition with the end of the year can simplify reporting and compliance. Accurate records of annual compensation and deferrals are essential for year-end non-discrimination testing and changing systems may require additional reconciliation at year end. A mid-year switch could also lead to over-contributions to retirement accounts, necessitating corrective distributions by March 15 of the following year to avoid a 10% excise tax penalty.
Ensuring Accurate Data Migration
Accurate data migration is critical to a successful payroll conversion. Collaborate with your new payroll provider and IT team to ensure employee deferral rates are correctly transferred. Post-migration data validation can prevent missed deferral opportunities, which could otherwise require corrective contributions of up to 50% of the missed employee contribution, 100% of the missed employer contribution, and lost earnings. Ensure the new system has all the necessary direct deposit information to avoid delays in participant contributions. Implement additional manual controls to verify the accuracy and timeliness of payroll contributions during the initial payroll cycles post-conversion.
Retaining Legacy System Data
Even after selecting a new system and completing data migration, retaining data from the legacy system is essential. The IRS mandates retaining timecards and pay rate schedules for at least two years, and payroll records, including wage dates and tax deposits, for at least four years. If your plan is subject to audits, you will need access to detailed pay registers and HR documentation. Some payroll services offer continued access to reporting functions for a fee, while others may require running both systems in tandem during the retention period. Don’t wait to talk to your Plan auditor or a trusted advisor about these reports! They can provide guidance about required audit tests to ensure your Plan’s activity is adequately documented, saving you time, possible overages and a headache later on.
By considering these factors, you can ensure a smooth transition to a new payroll system while maintaining compliance and minimizing disruptions to your employee benefit plan.