Payroll accuracy throwing you for a loop?

It’s easy to agree that ensuring your payroll is accurate is important to your business. Payroll errors can cost your company – in employee time spent to correct errors, benefits dollars lost to missed payroll deductions and more. Long term, it can also erode trust with your employees. With financial stress at an all-time high, the last thing an employee wants is an unexpected error in their paycheck.

So, what does payroll have to do with your benefits administration platform? One common payroll error is miscalculating pay, and your benefits administration processes play a role. When your benefits administration system and your payroll system aren’t on speaking terms, employee benefit payroll deductions can get out of sync. So, how does this disconnect occur, and what’s the solution?

Traditional payroll processing

When employees elect their benefits, many of these benefits will come with a pre- or post-tax payroll deduction. In a standard payroll process, the benefits administrator sends a payroll file on a pre-determined frequency, which communicates to the employer how much to deduct from each employee’s paycheck.

The problem is, that’s where the communication stops. The loop is left open – meaning the benefits administrator doesn’t know if the payroll deduction was taken, or not. The administrator can’t help identify errors or intervene when discrepancies arise. Payroll staff must manually audit to keep on top of any deductions that don’t match what’s expected.

Consider this example:

  • Jen enrolled in benefits when she started working at ABC Corporation. She contributes $500 biweekly from her paycheck toward her benefits.
  • Unfortunately, Jen recently had to take an unpaid leave of absence for 4 weeks. The good news for Jen is that her benefits continued throughout her leave.
  • However, because she wasn’t receiving a paycheck during her leave, her payroll deductions weren’t taken. By the time Jen returns to work, she’s $1,000 behind on her benefits.
  • Now what?

In the best-case scenario, her employer notices this discrepancy through manual audits, and works with Jen to determine the least disruptive way to catch up on the missed deductions, whether that means one lump sum or spread out over a few pay periods.

But it’s also possible for an organization to overlook the error completely, increasing the company’s benefit spend unexpectedly. Multiply this scenario times many employees each year, and it can become a significant risk to exceeding the planned employee benefits budget.

What is closed loop payroll?

In closed loop payroll processing, the process starts out the same as with traditional payroll processing. The employee elects their benefits, and the benefits administrator sends a payroll file back to the employer on a regular basis outlining employee deductions.

What’s different in this approach is that the loop is “closed” each time payroll occurs. A file is sent back to the benefits administrator that indicates what deductions were taken during the payroll run. That information is able to be analyzed by the benefits administration platform to identify discrepancies. The next time a payroll file is sent from the administrator, it’ll include the standard deductions plus any additional makeup deductions (or credits) that should be processed in the next payroll run.

What does this look like in practice?

  • Once again, Jen takes her 4-week unpaid leave. Only this time, her employer is using closed loop payroll. Because Jen isn’t receiving a paycheck during her leave, no deduction is taken.
  • After the first pay period during her leave, the employer sends back a file that indicates no deduction was taken for Jen.
  • The benefits administrator sends an updated payroll file showing Jen should now have $1000 in deductions at her next paycheck ($500 standard deduction, plus $500 in missed deductions).
  • This process would then repeat until Jen returns to work and begins receiving her paycheck, at which point her employer may choose to pro-rate the retroactive deductions to insulate Jen from the large make-up payments.

Closed loop payroll processing can catch discrepancies caused by:

  • Benefit changes that became effective in a prior pay period
  • New hires lagging in making elections after their initial effective date
  • Hourly workforces with variable paychecks
  • Unpaid leaves of absence
  • And more!

Why should you consider closed loop payroll?

  • Prevents leakage in employee benefits spend
  • Improves payroll accuracy and process improvement
  • Saves time spent on manual audits and intervention
  • Maintains employee confidence and supports financial wellbeing

Bottom line – closed loop payroll is the modern way to prevent payroll errors and reduce the risk created by manual process and one-off payroll corrections. Looking for a partner that can help you mitigate this risk? Workterra BenAdmin now offers closed loop payroll capabilities built into our highly flexible software.Click here to learn more about our closed loop payroll capabilities.

Workterra BenAdmin is built to handle the complexity of today’s employee benefits plans for midsized and large businesses. Connect with us today to meet our industry-leading combination of technology and hands-on customer service, as well as a full suite of administrative services that get HR teams back to focusing on what really matters – your people.

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