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Many employers spend hours reconciling payroll to ensure deductions are correct or they don’t correct deductions and end up losing thousands of dollars each month.

closed-loop-payroll

Here’s how the process can work better.  

In traditional outsourced benefits administration, the employer sends its administrative partner a census file that includes employee information and changes such as new hires, employment status or pay changes. To put it very simply, the administrator then uses this file to update its database and create enrollment or life event opportunities. Once the employee enrolls or makes allowable changes, the administrator sends a file back to the employer with any applicable payroll deductions, and the employer takes those deductions in the next payroll cycle.

Most employers do it this way and it works, when there aren’t any changes. However, throw in changes, corrections or late enrollments and this methodology often requires some manual intervention or off-cycle payroll runs, which 36% of companies do regularly and another 32% run daily. The result could be large retroactive deductions that aren’t palatable to the employee or it could mean employers don’t collect appropriate employee contributions for coverage. Neither of these scenarios is optimal.

Here’s an example of how the standard process works.

Julie goes on an unpaid 8-week leave of absence on December 1. During her leave, her benefits continue. Let’s assume her healthcare contribution is $100 per pay period and she gets paid every two weeks.

Julie’s employer sends over their census file showing Julie is on leave. Because benefits continue, the administrator sends back its regular payroll file with Julie’s bi-weekly $100 contribution.

However, because Julie isn’t receiving a paycheck, those deductions aren’t taken. That means her employer is now effectively owed $400 in healthcare coverage contributions.

When she returns, her employer can do a correction to either take the entire contribution from her next pay or spread it out over a number of pay periods. Either way, the employer needs to do an override or intervention of some sort and Julie will be subject to additional deductions in her paycheck.

Here’s the same example using closed loop payroll.

Using the same scenario of Julie going on an unpaid 8-week leave and the employer sending over their file indicating the leave, here’s where it’s different.

The administrator’s payroll file indicates the employer should take the ongoing $100 deduction. When the employer doesn’t accomplish that deduction because Julie isn’t receiving a paycheck, the employer sends over the actual deduction of $0 on their next census file. On their next payroll file, the administrator indicates the current deduction amount is $200.

The advantages of closed loop payroll.

In effect, in closed loop payroll, the employer validates the amount it actually deducts against the amount the administrator included on the payroll file. This enables the administrator to automatically recalibrate deductions with each subsequent payroll file. To insulate employees against large deductions, the employer and administrator establish per-pay thresholds and retroactive deductions are automatically prorated.

Closed loop payroll can also solve for changes that should have impacted a prior payroll cycle but were entered after the fact.

Let’s assume an employer has tiered contributions for healthcare coverage. Dan is promoted on Jan. 1 and his contributions increase from $50 per-pay-period to $75 per-pay-period. This change isn’t captured until the Jan. 15 census file. With closed loop payroll, the system will automatically calculate the retroactive deduction based on the payroll run dates and send it to the employer. In this way, the employer doesn’t have to do a manual intervention.

Traditional payroll processing is still the pre-eminent approach for administrators to provide deduction instructions to employers. However, closed loop payroll can help obviate the need for off-cycle payroll and manual interventions, along with large retroactive deductions or lost contributions. This includes employers with workforces that receive variable or low-amount paychecks and those where leaves or non-pay events are common. It can also help when new hires are eligible for benefits on day one but don’t make their elections until the end of their enrollment period when one or more pay periods have passed, among other scenarios.

Closed loop payroll addresses variability and the risk and cost of manual processing and off-cycle payroll events. It can help ensure that payroll is more accurate by balancing contributions and deductions throughout the year. Employees are protected from overpaying or being subject to large retroactive deductions, while employers ensure they collect all appropriate contributions. 

Businessolver does closed loop payroll for many clients. To learn more about our capabilities, visit our website.

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View all Posts by Monica Hinchey