Accounting Best Practices, Fifth Edition

17–23. Link the 401(k) Plan to the Payroll System

A common activity for the payroll staff is to take the 401(k) deduction information from the payroll records as soon as each payroll cycle is completed, enter it into a separate database for 401(k) deductions, copy this information onto a compact disc, and send it to the company’s 401(k) administration supplier, who uses it to determine the investment levels of all employees, as well as for discrimination testing. This can be a lengthy data-entry process if there are many employees, and it is certainly not a value-added activity when the core task is simply moving data from one database to another one.

The best way to avoid retyping 401(k) payroll deductions is to link the payroll system directly into a 401(k) plan. This is done by outsourcing the payroll processing function to a supplier that also offers a 401(k) plan. A good example of this is Automated Data Processing (ADP), which offers linkages to a number of well-known mutual funds through its payroll system. When a company uses ADP’s payroll and 401(k) services, a payroll department can record a 401(k) payroll deduction for an employee just once and ADP will then take the deduction and automatically move it into a 401(k) fund, with no additional bookkeeping required from the payroll staff. For those companies with many employees, this can represent a significant reduction in the workload of the payroll staff.

There are two problems with this best practice. One is that a company ...