Sudeshna Roy

Introduced in 2020, the Individual Coverage Health Reimbursement Arrangement, or ICHRA, has gained popularity as an affordable employer-sponsored health benefit. ICHRAs deliver employees access to more personalized health insurance plans and can make it easier for employers to manage their costs. 

The nature of ICHRA administration requires providers to manage dynamic payroll contributions and deductions that can change from month to month and employee to employee. As a result, ICHRA providers are increasingly relying on payroll integrations to access their customers’ payroll systems and manage reimbursements and deductions on their behalf. Bidirectional payroll integrations give providers two-way access to employers’ payroll systems, meaning they can work faster—and with fewer resources.

What is an ICHRA?

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-sponsored health benefit that reimburses employees for individual health insurance premiums and medical expenses. Employers set aside a monthly allowance for each employee, which they can use to cover the cost of their plan, eligible medical expenses, or both.

Unlike traditional group plans, ICHRAs offer flexibility, allowing employees to select any health plan that suits their needs and get reimbursed up to a limit defined by their employer. This provides tailored coverage options while effectively controlling costs.

Under an ICHRA, employees are reimbursed for qualified healthcare expenses through their paycheck up to the employer limit. In some cases, the employee may be able to pay for costs that exceed their reimbursement limit through payroll deductions. That means ICHRA providers need to be able to reimburse employees for their expenses and make deductions from their paychecks. 

Key components of ICHRA administration

Administering an Individual Coverage Health Reimbursement Arrangement (ICHRA) involves three key steps. 

Step 1: Set up reimbursement plans

To implement an ICHRA, the employer has to set reimbursement limits for each class of employee. The classes are defined by employment status (full-time, part-time, or temporary), geographic location, whether the employee is salaried or hourly, and whether the employee is part of a collective bargaining agreement. 

Step 2: Manage employee eligibility and enrollment

Once the reimbursement limit has been set, employees need to be enrolled in the plan based on eligibility criteria. ICHRA providers need to be able to pull employee data like hire date, employment status (full-time or part-time), and salary and wage information to determine eligibility and the right class for each employee. They’ll also need to track employees’ proof of coverage once submitted to ensure the plan meets regulatory requirements.

Step 3: Manage reimbursements and deductions

When an employee submits a reimbursement request, the provider needs to be able to track and approve requests and reimburse the employee for the correct amount through their paycheck. If the employee exceeds their reimbursement limit, they may be able to pay the balance through their paycheck as well—so providers also need to be able to manage payroll deductions within each pay cycle.

How payroll integrations power ICHRA administration

As the provider, the first step to successful ICHRA administration is ensuring you have accurate and timely access to an employer’s payroll data. Because health expenses can fluctuate month to month and employee to employee, the reimbursements and payroll deductions that ICHRAs require are complex and always changing. 

Without the ability to pull data directly from the payroll system and write changes back to that system, the responsibility of updating employees’ paychecks would fall on the employer. That’s a ton of work for any HR department, but especially taxing for small employers without the resources of enterprise businesses. Creating a best-in-class customer experience means reducing the administrative workload on your customers by managing this work on their behalf. 

But with multiple employers, all of which could have tens, hundreds, or thousands of employees, this is no small feat. Automating this work can help—and that’s where payroll integrations come in.

360° payroll integrations allow ICHRA providers to fetch data directly from the employers’ payroll systems and update reimbursements and deductions automatically—making it the most efficient and secure way to access mission-critical payroll data for ICHRA administrators. 

Let’s take a closer look at how payroll integrations can power ICHRA administration. 

1) Comprehensive, reliable data access

Payroll integrations create a seamless connection between the payroll system and your own software, syncing information between the two on a daily basis or on-demand. When an employee is hired, terminated, or sees a salary adjustment, that information is automatically shared with you—along with all the details you need to determine eligibility. And when the data is standardized—as it is through unified API providers like Finch—you can receive data from any payroll provider in the same format. (In other words, data is mapped across different providers’ various field names to a single, consistent field name.)

Removing manual processes from the workflow—like asking employers to manually send files with payroll information—can increase the overall accuracy of the data and create a better experience for your customers. HR admins spend an average nine hours per week manually updating benefits-related data between systems. 

2) Automated payroll contributions 

After each statement period, you likely deliver a report with the total reimbursements due to each employee. The employer will then take that information and either upload it to their payroll systems themselves or work with their payroll provider to distribute the reimbursements to each employee. 

Now imagine how much better the employer experience would be if that were done automatically. Bidirectional payroll integrations enable just that: you can write the employer’s contributions to each individual employee’s paycheck, through the payroll system, without ever having to involve the employer.

Each employee’s total reimbursement can vary each period, so using automated workflows to calculate what they’re owed and write the amount back to the payroll system guarantees the employer makes accurate contributions each period. This ensures that each employee is reimbursed in full for all of their qualified medical expenses in a given period, and unused funds are retained by the employer.

3) Automated payroll deductions

Under some plans, employees whose premiums exceed their reimbursement limit can use pre-tax deductions from their paycheck to pay the balance. In that case, you as the provider need to be able to make payroll deductions equal to the amount the employee owes each month.

Like with employer contributions, deductions can be automatically managed through 360° payroll integrations. Based on their class and reimbursement limit, you can calculate how much needs to be deducted from an employee’s paycheck before taxes to cover their health plan expenses, then send that information to the payroll system on the employer’s behalf. 

4) Improved efficiency

Directly connecting to an employer’s source of truth through a payroll integration eliminates bottlenecks in ICHRA administration. For example: you can pull all the data pertaining to employee eligibility to quickly identify eligible employees and their reimbursement class during enrollment. Plus, when employee data is refreshed daily or on-demand, you don’t need to wait for employers to send their payroll data through manual channels or SFTP to begin processing contributions or deductions.

5) Improved compliance and better reporting

As in any regulated industry, maintaining compliance with state and federal ICHRA requirements is paramount. With on-demand access to standardized data from each employer, you can easily verify that each employee is eligible to participate and that the plan complies with requirements defined by the ACA, ERISA, and other government regulations. For example, payroll integrations make it easier for you as an ICHRA provider or for a third-party administrator to automatically verify that ICHRA plans do not favor highly compensated employees and adhere to IRS non-discrimination rules. 

Plus, evergreen access to employers’ organization and payroll data means you can more easily offer additional administrative benefits, like year-to-date summaries and insights from census data that could help employers to understand how they can best serve their workforce. For example, you might highlight that the employer has enough hourly employees to add an additional ICHRA class.

Unlock access to hundreds of HR and payroll systems with Finch

Payroll integrations have immense value in ICHRA administration, but building and maintaining multiple API integrations is costly, resource-intensive, and often not scalable. With Finch’s Unified Employment API, you only need to build one integration—to Finch—to access hundreds of payroll and HR systems at once.

Finch offers the widest and deepest available coverage of HR and payroll systems—4x more than any other unified API. Schedule a call with our sales team to learn more, or try it yourself for free.

The demand for specialized employee benefits management solutions is rising as employers seek better, more personalized packages to attract and retain top talent in an increasingly diverse and virtualized workforce. The global employee benefits platform market is projected to double to $2 billion between 2024 and 2032, while the broader benefits broker market is already valued at $43 billion.

New federal legislation and employer incentives that aim to increase the average American’s savings have given rise to a new breed of tech-forward, personalized benefits that offer more affordable alternatives to traditional employer-sponsored benefits. By leveraging technology like API-based payroll integrations, these benefits providers are able to automate and streamline admin processes, which significantly reduces costs for employers. The result is more accessible, affordable, and easily implemented benefits for employees.

What are employer-sponsored benefits?

Employer-sponsored benefits include workplace benefits that are fully or partially paid for by the employer—things like health insurance, health savings accounts (HSA), retirement plans, financial wellness programs, emergency financing, and fringe benefits. Benefits sponsored by an employer are typically available to employees at a significantly lower cost than if they were to access them directly. 

Today, the cost of offering and administering traditional benefits like retirement accounts and health insurance has become so expensive that some small to midsize business (SMB) employers can’t afford to sponsor them. The new wave of employer-sponsored benefits, supported by tech-forward providers, offer alternative benefits, made more affordable in large part because they’re more efficient. Examples include health savings and reimbursement arrangements (ICHRA), simplified retirement plans, and emergency savings/financing options. 

Many of these new-age benefits work by directly integrating with the employer’s payroll system to streamline data collection and manage payroll deductions automatically. This direct connection reduces the administrative burden on both the employer and the benefits provider and makes it easier to calculate the tax impact of those deductions and contributions.

But gaining bi-directional access to those payroll systems is easier said than done, which is why employee benefits management has traditionally been so challenging and expensive. 

Challenges of traditional employee benefits management

To effectively administer benefits to their customers’ employees, benefits providers need to enroll eligible employees in relevant plans, stay up-to-date on qualified life events, manage employee deductions or employer contributions, and maintain compliance with state and federal regulations. Without direct access to the employer’s payroll system, these tasks become challenging for a variety of reasons.

Challenge 1: Difficulty in collecting accurate and timely data 

Without payroll integrations, benefits applications have to rely on file-based data-sharing methods like SFTP or CSV uploads to access the information held in employers’ payroll systems. This requires significant HR admin work: employers either manually enter details into the benefits systems or request batch files from payroll providers, often at an additional fee. While file-based data transfer doesn’t inherently impact the data, manual touchpoints in file-based data-sharing methods increase the risk of errors and lead to bad data in the form of typos and other inaccuracies. 

“Manual file uploads are not only time-consuming, they’re wrought with errors. It simply didn’t align with our product vision.” – Erika Davison Aviles, Co-Founder and Head of Product, TempoPay. 

Moreover, payroll data isn’t standardized across providers, meaning each provider stores the same information in different formats and under different field names. File-based data sharing methods like SFTP don’t address this issue, forcing benefits providers to standardize the incoming data and adding further complexity to the process.

Challenge 2: The complexity of creating and updating deductions

Benefits providers need to keep a close tab on payroll deductions, which can vary based on things like employees enrolling in new benefits, adjusting their elections, or making changes to retirement contributions. For example, an employee might want to increase their contributions to a 401(k) or payroll-linked emergency savings account at any time.

Benefits applications also need to write those changes back to the employer’s payroll system so the most updated deductions and contributions information are reflected on the employee’s paycheck. Accuracy and timeliness here are critical, raising the stakes for benefits applications that rely on manual processes. 

If the benefits provider doesn’t have direct access to the payroll system, HR administrators may be on the hook for manually making these adjustments—a workflow that costs employers hundreds of man-hours and thousands of dollars each year. For instance, 64% of HR leaders spend 9 hours weekly on manual data entry, with each data point costing an average of $4.78. 

This is particularly challenging for SMBs with small HR teams and without the budget to sponsor traditional benefit packages.

Challenge 3: Security and compliance issues

The sensitive and personal nature of employment data, which includes details like SSNs and financial information, makes employee benefits a highly regulated industry. Payroll and employment data are governed by strict regulations regarding how this data is collected, stored, and used. 

And staying compliant isn’t just about how that data is shared—the provider also has to keep track of employee eligibility data, like when new employees can join plans, when employees leave the company, or when a qualifying life event occurs. Non-compliance means steep penalties for the employer—talk about a bad user experience.

The slow, manual nature of old-school integration methods makes it hard for both employers and benefits providers to stay on top of compliance guidelines while managing employee benefits.

Advantages of using payroll API integrations to power employer-sponsored benefits management

Application programming interfaces (APIs) allow two systems to connect with each other to share information reliably and securely. Specifically, payroll APIs allow benefits providers to connect their software with the employer’s payroll system to automatically pull relevant data and write changes back.

API-based payroll integrations are a game-changer when it comes to employee benefits management. They offer several advantages like:

• Automatic data collection
• Enhanced data security
• Automated eligibility checks
• Streamlined onboarding and enrollment
• Dynamic deductions management

Automatic data collection

Payroll API integrations create a direct connection between the payroll provider and the benefits application, offering access to payroll data in near real-time. 

Unlike manual data-sharing methods that only update periodically, API integrations ensure data is always current. This enables benefits providers to quickly verify employee information, track changes, and adjust contributions or deductions on an ongoing basis, not just at the end of each pay cycle. This near-real-time data transfer significantly improves accuracy and plan responsiveness and reduces the risk of compliance failures.

Plus, with API integrations, employers only need to authorize data access once when setting up the connection. After that, they don’t need to worry about how and when the data is shared on a day-to-day basis. This saves HR admins hours each week, allowing them to focus on more strategic tasks. 

Enhanced data security

Using payroll integrations enhances data security by eliminating the need to send sensitive personal information (PII) through insecure channels like email. Even FTP-based file transfers are at risk of being intercepted if not properly authenticated and encrypted.

API-based payroll integrations, on the other hand, provide a secure, thoroughly encrypted connection between payroll systems and benefits applications, protecting employee data from unauthorized access and breaches. This increased security is crucial for maintaining trust and compliance with data protection regulations, safeguarding both employee information and the organization’s reputation.

Automated eligibility checks

With payroll API integrations, benefits applications can efficiently collect and organize key details like hire dates, employment status, and compensation. This allows them to automatically determine eligibility based on criteria like tenure, job title, and salary—improving the operational efficiency of benefit plans. For example, they can automatically verify if an employee meets the service length, employment status, and compensation requirements for various tax-advantaged plans like 401(k).

Streamlined enrollment

Payroll integrations make enrolling in benefits faster and easier through continuous access to the most up-to-date employee data. Auto-enrolling employees in benefits plans using payroll integrations eliminates the need for monotonous data entry and multiple back-and-forths. This further reduces the complexity and friction often associated with benefits administration, leading to a better overall user experience.

Dynamic deductions management

Bi-directional or 360° payroll integrations let benefits applications automatically read vital employment data and write deductions back to each employer’s payroll system without having to go through the employer or communicate with the payroll provider. This ensures that payroll is always up-to-date and adjusted for any changes in employee benefits, like changes in coverage or contribution levels. By giving the benefits provider the ability to adjust the payroll directly, API integrations minimize errors, ensure compliance, and provide a smooth, hassle-free user experience throughout the benefits lifecycle.

Examples of how payroll integrations simplify employee benefits management

Payroll integrations simplify the implementation and management of various employee benefits by automating data collection and deduction updates, reducing errors, and enhancing overall efficiency. Let’s look at a few real-life use cases.

1) How payroll integrations simplify HSA/FSA benefits processing

API integrations play a crucial role in managing Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). These applications need access to payroll data like employees’ contribution rates and salaries or hourly wages in order to calculate how much should be deducted from each paycheck. With 360° payroll integrations, HSAs and FSAs can automatically create and modify pre-tax contributions in the payroll system. They can then confirm that contributions are correctly withheld from each paycheck and updates are seamlessly applied in accordance with IRS limits.

For example, Lane Health, a Health Savings Account (HSA) provider, saved their customers 8-12 hours of manual data entry each month by using payroll API integrations.

2) How payroll integrations streamline student loan repayment benefits

Helping employees to pay off their student loans through tax-free deductions is a benefit that is quickly increasing in popularity. Payroll integrations dynamically adjust deductions based on what percentage of their paycheck employees choose to contribute. They can also incorporate employer matches, automatically calculating and adding these contributions. This automation ensures that repayments are consistent and accurate.

3) How payroll integrations simplify financial wellness benefits processing

Financial wellness programs benefit greatly from payroll integrations. By syncing detailed and holistic compensation information—including salary, bonuses or commissions, and equity—these platforms can offer personalized educational insights and tips to employees, such as how much to save or budget each month. This data-driven approach helps employees make informed financial decisions, enhancing their overall financial health. Payroll integrations also ensure that the advice provided is based on the total picture of the employee’s compensation, making financial wellness programs more effective and tailored to individual needs.

4) How payroll integrations simplify fringe benefits processing

Fringe benefits can include anything from commuter benefits to mental wellness programs. By using payroll integrations, fringe benefit platforms can offer a smoother and more enjoyable experience to employers and employees. For example, commuter benefits applications can use payroll integrations to accurately calculate and apply pre-tax deductions for transit passes or parking expenses. 

Payroll integrations are the future of seamless employee benefits management

To sum it up, the demand for affordable and personalized employee benefits is growing rapidly, and tech-savvy benefits providers are riding this momentum by using 360° payroll integrations to offer innovative solutions to employers of all sizes. By directly integrating with employers’ payroll systems, these benefits applications are streamlining data access to save time and reduce errors—ensuring a more affordable and more accessible experience for both employers and employees. 

Unlock access to hundreds of HR and payroll systems with Finch

Finch’s Unified Employment API gives benefits providers read and write access to data from hundreds of HR and payroll providers, covering 88% of the U.S. payroll market—all through a single integration. With Finch, you can scale HR and payroll integrations, simplify employer onboarding, auto-enroll employees in benefits plans, and manage deductions automatically, all without the hassle of ongoing integration maintenance.

Using Finch means spending less time building technical bridges and more time on product innovation. Schedule a call with our sales team to learn more about how we can support your specific use case, or try it yourself for free.

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We’re thrilled to share that Finch has been named the Best Enterprise Software Product in the SaaS Revolutionaries by SaaStock. This award highlights our relentless dedication to innovation and excellence in democratizing access to employment data.

SaaS Revolutionaries recognizes and celebrates the SaaS startups taking the reins in North America. This year it honored SaaS disruptors across six different categories, including business growth, go-to-market strategies, entrepreneurship, and product. 

Finch's recognition in this competitive arena underscores our status as a disruptive SaaS solution that provides exceptional value to enterprise customers, further solidifying our reputation as a leader in the rapidly emerging unified API market.

“Our mission at Finch is to revolutionize the employment ecosystem by enhancing connectivity and providing seamless access to critical employment data,” said Ansel Parikh, Co-Founder and COO of Finch. “SaaStock’s recognition reinforces our dedication to supporting innovators as they continue to push the boundaries of what’s possible in employment technology.”

Want to learn more about Finch?

Finch is the #1 unified API for employment data, arming innovators with read and write access to 200+ employment systems, all through a single integration. If you are driving innovation with employment data, get started with our self-serve platform today—it’s free!

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At a time when nearly half of the American households have no retirement savings, we can no longer rely on plan practices that were introduced 40 years ago. Today’s service providers are increasingly becoming aware that participation in retirement plans hinges on how easy it is to access and manage those plans—especially for small to midsize business (SMB) sponsors. This makes the 401(k) plan sponsor and participant experience vital for recordkeepers, third-party administrators (TPAs), and advisors.

A seamless user experience spans from sponsor onboarding to day-to-day plan management.  Poor user experience often stems from cumbersome data access methods, largely because they slow everything down and make more work for everyone involved. Manual processes like SFTP have long burdened sponsors with unavoidable admin tasks, increased compliance risks, and dampened employee participation. 

But change is on the horizon. Employer expectations are shifting rapidly. Plus, with SECURE 2.0 fueling the rise of SMB sponsors, recordkeepers are at a junction to redefine and automate operations to lighten the administrative burden on sponsors.

Why the 401(k) plan sponsor experience is more important than ever

Delivering a top-notch 401(k) user experience is crucial. But to truly nail it, you need to understand what’s shaping plan sponsors’ expectations of their digital retirement service providers. These include:

• New regulations like SECURE 2.0 and state mandates 
• Surge in new, first-time SMB sponsors
• Increasing need for connectivity
• Mounting complexity of staying compliant

New legislative updates

SECURE Act 2.0 shook up the retirement game for sponsors, participants, and service providers alike. SECURE 2.0 aims to boost accessibility, bridge coverage gaps, and amp up individual retirement savings. With perks like auto-enrollment and expanded eligibility criteria, it's leveling up employer-sponsored plans. SECURE 2.0 also rolled out new plan types, like Pooled Employer Plans (PEPs), offering more options and coverage than ever before. 

Recordkeepers who simplify auto-enrollment and contribution escalation and support new plans like PEPs are poised to attract more clients. Without these features, sponsors face the headache of manually enrolling employees and adjusting contributions every year. Any slip-up here can result in fines and penalties—which greatly reduces the user experience. Sponsors now want hassle-free plan setups and seek to be minimally involved in plan management. Recordkeepers that meet these demands will succeed in customer acquisition and retention in the long haul.

The influx of new SMB sponsors 

Federal incentives like startup tax credits and state mandates are pulling in a flood of new SMB sponsors to the retirement scene. Unlike big corporations with hefty HR departments, these smaller employers need more support from their recordkeepers and TPAs. Employees at these companies wear a lot of hats, so they have limited bandwidth to administer the plans, meaning they're eyeing recordkeepers who can lighten their load—especially with tasks like SFTP setups or payroll file uploads. 

Plus, SMB sponsors are cost-sensitive, meaning they want top-notch service on a budget. To remain competitive and profitable, recordkeepers need to trim down their operational overheads while outsourcing much of the administrative work of these sponsors.

Related reading: Challenges of Managing Small Business Retirement Plans 

Increased need for connectivity

Today, an average organization has more than 16 HR solutions in its tech arsenal. As the tool count climbs, employers are prioritizing integrations more than ever. In a recent survey of over 1,000 HR professionals, a whopping 97% said they want their systems to work seamlessly with others, and 51% confessed that juggling multiple employment systems throughout the day leaves them feeling overwhelmed, frustrated, or stressed. Today’s sponsors know that integrations can help them improve the employee experience as well as boost plan participation.

Increasing difficulty of compliance

Streamlined compliance is crucial to keep 401(k) plan users happy. But manual processes, heavy workloads, and tricky regulations make it tough for sponsors and recordkeepers to stay compliant. Old-school methods like SFTP and manual file transfer don’t work in real-time. Both make compliance difficult by causing delays in data exchange, and manual methods like sharing data via email or tools like Dropbox are both insecure and increase the likelihood of typos and errors. 

Compliance is even trickier under SECURE 2.0, with its complex plan designs and nuanced eligibility rules. Plus, retirement regulations are always changing, requiring constant monitoring and adaptation from recordkeepers. Any mistake, delay, or oversight can result in heavy penalties for sponsors and diminish their experience as users. It’s safe to say that recordkeepers need efficient, automated ways to minimize risk and manual tasks when sharing vital employment data.

How recordkeepers can use API integrations to optimize the 401(k) plan sponsor experience

Easier access to payroll data can solve nearly all of the challenges associated with plan management and enable recordkeepers to optimize the user experience.

Many forward-thinking recordkeepers are changing the game with API-based payroll integrations. These integrations let recordkeepers fetch data straight from sponsors' payroll systems, skipping all the manual steps. 

API integrations have several advantages when it comes to improving 401(k) sponsor and participant experience. They can help recordkeepers:

• Simplify sponsor onboarding and auto-enrollment
• Reduce administrative hassle for sponsors
• Make compliance easier
• Automate routine tasks 

Simplify sponsor onboarding 

To craft a winning user experience, recordkeepers need to start by simplifying the onboarding journey for sponsors. But it's no walk in the park. With employee census and payroll data locked away in their HR and payroll systems, recordkeepers either need to collaborate with both the sponsor and their payroll provider to establish an SFTP connection, or they need to rely on the sponsor to routinely download data from the payroll system and share the files in a timely manner. 

Building SFTP connections can drag on for months, and manual file transfers are prone to delays and bad data. Recordkeepers need to implement a simple, more efficient way to make it easy for sponsors to authorize access to their employment data. A smooth onboarding process builds trust with sponsors from the get-go and paves the way for an exceptional user experience.

Related reading: How to Simplify 401(k) Sponsor Onboarding 

Reduce administrative burden for sponsors

Sponsors are over the manual grunt work that comes with managing a 401(k) plan, like data entry and creating CSV files to share with recordkeepers. Replacing antiquated data-sharing methods like SFTP with payroll API integrations enables recordkeepers to ease sponsors' workload, cutting down on admin tasks, eliminating constant back-and-forth, and streamlining data transfer.

By granting secure and direct access to their HRIS and payroll data through direct integrations, sponsors arm recordkeepers with the accurate and timely information they need to run the show efficiently. Better yet, API integrations are a one-time task for sponsors—once they’re granted access to the payroll system, the recordkeeper can pull all the data they need without ongoing involvement from sponsors.

Increase participation with auto-enrollment

Since SECURE 2.0’s passage, the 401(k) sponsor experience has become closely tied to how efficiently employees can be automatically enrolled into specific plans upon eligibility. This is also critical for increasing plan participation and engagement. Vanguard plans with automatic enrollment features had a 93% participation rate, compared to 70% for plans with voluntary enrollment. 

But without payroll integrations, auto-enrollment gets dicey and cumbersome. New eligibility criteria for part-time and older employees introduced in SECURE 2.0 make this situation even trickier for recordkeepers that follow a manual approach. But with direct access to sponsors' data, recordkeepers can program their systems to spot when employees are eligible to join the employer's plan as well as send out automated notifications—further boosting the user experience of 401(k) sponsors and participants.

Make compliance easier

Even when the recordkeeper isn’t to blame, compliance penalties can have a harsh negative impact on the sponsor’s opinion of their provider. Manual data-sharing methods are rife with typos and errors; plus, the recordkeeper rarely has control over when they receive the data from the sponsor, which can adversely impact when contributions are made. 

API integrations give recordkeepers the power to fetch all required data in real time, ensuring no eligible employee is overlooked and that their investment contributions are correct and made on time. With a 360° payroll integration, recordkeepers can even update deduction changes directly within the sponsor’s payroll system, reducing the risk of compliance slip-ups.

Automate routine tasks

As user experience becomes a top priority in 401(k) plan management, recordkeepers must focus their efforts on delivering a standout digital experience. To do this, they need to first free up their operational and engineering bandwidth that is currently spent on inefficient manual processes and building technical bridges between systems. API integrations streamline regular data pulls from sponsors' HR and payroll systems. That way, the recordkeeper avoids otherwise manual tasks, including tracking down files, data validation, eligibility verification, enrollment, investment calculations, and so on. 

Improve 401(k) user experience with payroll API integrations

Bottom line, integrating with sponsors' HRIS and payroll systems is no longer a choice, but a must for recordkeepers to operate faster and better. 

However, building and maintaining API integrations with multiple payroll systems is costly, resource-heavy, and often not scalable. This limits recordkeepers’ ability to automate processes. Using integration tools like unified APIs to scale payroll integrations can help recordkeepers access data from hundreds of payroll systems with a single integration, reducing the time and cost associated with integration builds. 

Unified APIs also help recordkeepers save further operational bandwidth by standardizing fetched data into a common, more manageable format that’s easier to work with. These benefits are ultimately paid forward to the users, creating a best-in-class experience for sponsors and participants alike.

Check out our latest whitepaper, "The Changing Retirement Landscape," to dive deeper into these industry trends and discover how recordkeepers can adapt and thrive in the era of SECURE 2.0.

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Since its debut in 1978, the 401(k) plan has become a prized perk for big corporations to attract top talent. However, the steep setup and upkeep costs, administrative issues, and the lack of suitable small business retirement plans have since limited small and mid-sized business (SMB) employers’ ability to offer such plans. Today, while more than 90% of employers with 500+ employees offer a 401(k), the opposite holds true for those with fewer than 100 employees. Only a third of these companies offer their employees a 401(k) option.

Fortunately, the tides are turning. Recent legislative updates like SECURE 1.0 and 2.0 introduced several initiatives for SMB sponsors like Pooled Employer Plans (PEPs) and start-up tax credits. This sparked a wave of new SMB employers entering the retirement market, increasing the demand for personalized small business retirement plans.

While the influx of new sponsors is a positive development for retirement service providers like recordkeepers, third-party administrators (TPAs), and plan advisors, it also presents its own challenges. SMB sponsors often need extra support and watch their costs closely. Managing numerous small business retirement plans also adds to the workload of recordkeepers. 

To succeed in this changing landscape, recordkeepers need to find innovative solutions and build efficient automated workflows to handle the increasing demands while maintaining profitability and steady growth. In this article, we'll explore the challenges of serving first-time SMB sponsors as a retirement service provider and how recordkeepers can serve them efficiently.

Common challenges of serving new, first-time SMB 401(k) sponsors

To reduce the coverage gap and manage small business retirement plans better, it’s crucial for recordkeepers and TPAs to understand what makes some small firms offer a 401(k) plan while others don’t. This involves considering factors like revenue stability, business size, 401(k) plan costs, and how much administrative work it takes to manage the plans. 

Managing 401(k) plans for new small and medium-sized business (SMB) sponsors poses several challenges for recordkeepers, including:

• SMB sponsor’s limited awareness of retirement plans and available incentives 
• Increased need for ongoing customer support
• Cost sensitivity among SMB sponsors
• Higher demand for customization
• Difficulty accessing data from SMB payroll systems
• Increasing operational workload with more SMB clients

Challenge 1: SMB sponsors lack awareness of retirement plans and available incentives

Many small firms aren't familiar with the range of retirement plan options available to ease their cost and administrative burdens. While most know about 401(k)s, few are acquainted with SIMPLE, SEP, and MEP/PEP plans, and 72% reported being unaware of tax credits that could help offset the startup costs of launching a new plan. They also tend to overestimate the financial and time commitments needed to offer a plan.

Lack of awareness and misconceptions about retirement plans make SMB employers hesitant to start their own retirement plans. Although SECURE 2.0 aims to increase the number of SMB employers offering 401(k) plans, recordkeepers will need to put in significant effort to overcome the inertia in the untapped SMB market.

Challenge 2: SMB sponsors need more ongoing customer support

SMB sponsors often lack the know-how and resources needed to effectively support a retirement plan. From selecting the right plan to handling ongoing management, the prospect of starting a plan can overwhelm already busy business owners and small HR teams. In fact, 63% of SMB employers not offering retirement plans cite resource constraints as the reason.

Under this scenario, recordkeepers stepping in to assist small businesses must simplify routine activities like plan enrollment, compliance testing, contribution investment, and deduction management. They should also provide ongoing support to help sponsors navigate the complexities of 401(k) plans and stay abreast of regulatory changes with the necessary resources.

Challenge 3: SMB sponsors are cost-sensitive

Small businesses are usually hyper-focused on costs. A lot of owners and HR managers assume that traditional retirement plans are too pricey and involve additional fees and hidden costs. In fact, about half of small businesses with 99 or fewer employees say they find it hard to afford retirement plans. Their cost sensitivity is further amplified due to the volatile cash flow of small businesses.

Recordkeepers aiming to help them out need to support modern plan options like PEPs to help new sponsors cut down administrative costs of setting up a plan. They also need to figure out better pricing models, innovative solutions, and operational strategies that balance making a profit with offering competitive rates and top-notch services.

Challenge 4: SMB sponsors need greater customization 

Similar to big companies, small and mid-sized businesses (SMBs) have diverse employee demographics with varied financial goals. This leads SMB employers to seek personalized retirement plans akin to larger organizations. However, because of limited resources and budget constraints, achieving enterprise-level customization is often challenging for them.

To win more SMB businesses, recordkeepers need to tailor their services to suit these diverse needs and preferences. They need to adopt ingenious approaches, flexible systems, and automated processes that can accommodate a wide range of unique client needs at a lower cost.

Challenge 5: Difficulty accessing data from SMB payroll systems

As a whole, the retirement industry is still heavily reliant on outdated data-sharing methods for accessing sponsor payroll data. Currently, the most common method recordkeepers use is SFTP, which is manual and inflexible, like any file-based data-sharing method. This hands-on method adds more stress to sponsors who already lack the bandwidth to manage a plan. With SFTP, sponsors often need to routinely create, update, and share data files with recordkeepers to keep everything running smoothly. 

On top of that, setting up SFTP connections is time-consuming and resource-intensive, which further burdens recordkeepers with manual tasks and extensive back-and-forth communication.

In this scenario, automated solutions like API integrations can be a superior alternative for recordkeepers to seamlessly access sponsor data from their payroll systems. However, the SMB payroll market in the U.S. is highly fragmented, with nearly 6,000 payroll providers, and only a few of them allow other applications to integrate directly. In fact, the vast majority of payroll providers either have a gated API or no API at all—adding to the pain of accessing payroll data.

Challenge 6: More SMB sponsors means a greater operational burden 

With more SMB employers offering retirement benefits, the daily workload for recordkeepers’ Operations, Engineering, and Client Success teams is set to skyrocket. Balancing this surge in workload while maintaining service quality becomes paramount for recordkeepers striving to meet their clients' needs effectively. The current industry norm relies heavily on manual processes, from validating sponsor data to managing fund investments—adding friction to each step of plan administration. This leaves recordkeepers facing a crucial decision: substantially grow their Operations headcount or seek more efficient solutions.

How 401(k) recordkeepers can streamline small business retirement plan management

To enhance their service delivery and better meet the needs of SMB sponsors, recordkeepers can take several steps. They can:

• Automate processes to improve operational efficiency
• Simplify data access to develop smoother and faster workflows
• Leverage modern technology to offer best-in-class customer support

Automate processes to improve operational efficiency

First and foremost, to effectively handle the growing workload, recordkeepers should prioritize automating tasks that are currently done manually: automatically enrolling employees based on eligibility, quickly determining what dollar amount to invest, and pushing changes directly back to the payroll system. This allows recordkeepers to reallocate Operations headcount to other teams and invest more resources into strategic initiatives like attracting new customers and improving their product offerings. Read our latest whitepaper to delve deeper into how recordkeepers can streamline the processes involved in managing 401(k) plans through automation.

Simplify data access

Much of the manual labor involved in managing 401(k) plans revolves around creating and sharing data files with each pay period. To truly automate plan management, it's crucial to leverage innovative solutions that streamline data access. Recordkeepers can greatly benefit from using integration tools like unified APIs, which offer quick and reliable access to multiple payroll systems through a single integration.

Unified APIs also standardize data from various providers into a common format, making it easier to work with. Take Finch’s Unified API for instance, which integrates with multiple payroll providers, including niche, long-tail platforms tailored to serve small and mid-sized businesses. Automated integrations enable recordkeepers to automatically fetch income and deferral rates each pay cycle and seamlessly update deduction changes back to the payroll system without involving the sponsor—while significantly reducing engineering costs. Such efficiency greatly eases the burden on the recordkeeper’s Operations team and ensures a smooth user experience.

Offer best-in-class customer-support

As mentioned earlier, many SMB sponsors don’t offer retirement plans because they aren’t familiar with the available options, incentives, and fiduciary responsibilities. Recordkeepers who can offer a better user experience, simplify plan setup and management, and reduce the administrative burden of already overworked HR teams will emerge as the most employer-friendly solutions and win the long game of customer retention and loyalty in an increasingly competitive U.S. retirement market.

Unlock access to hundreds of payroll and HRIS systems with Finch

Finch’s Unified Employment API streamlines operations for retirement and benefits providers by eliminating the need for manual data processing. It helps you spend less time building technical bridges and more time tailoring your product and services to better serve SMB sponsors. With access to over 200 payroll and HRIS systems powered through a single integration, Finch offers the widest and deepest coverage available—4x more than any other unified API. Schedule a call with our sales team to learn more, or try it yourself for free.

The retirement landscape in the U.S. is evolving rapidly. While an aging population is grappling with the possibility of outliving their savings, the average household retirement funds are falling significantly short of creating a safety net for future retirees. At the same time, the influx of tech-savvy Gen Z employees and legislation updates are changing sponsor expectations, highlighting the need for smooth digital experiences. Together, these shifts are driving the defining retirement industry trends of the moment.

We anticipate four key trends will shape the future of retirement for the next decade:

• There will be a greater emphasis on better connectivity that’ll make it easier for sponsors, plan administrators, and participants to share information in real time. 
• Automation is set to become a bigger part of operations for plan administrators, allowing them to streamline processes, reduce manual tasks, and boost overall efficiency. 
• Recordkeepers and TPAs will prioritize improving user experiences to win in an increasingly competitive market. 
• Lastly, staying on top of changing regulations will get trickier, demanding proactive strategies and innovative solutions to stay compliant and reduce risks.
  

In this article, we'll explore these key retirement industry trends, their drivers, and what lies ahead for retirement service providers in 2024 and beyond.  

What’s driving the shift in the retirement industry

Before diving into the top retirement trends, let's explore the key drivers behind this transformative shift:

• The looming retirement crisis in the U.S.
• Recent legislative changes
• Evolving sponsor expectations

The looming retirement crisis in the U.S.

The retirement crisis in the U.S. is starkly evident. In 2023, surveys showed that Americans feel they'll need around $1.27 million to retire comfortably. However, half of American households have no retirement savings at all. Among those who do, the savings are often insufficient, with less than $90,000 in retirement accounts on average. Over half of small to mid-sized business (SMB) employees lack access to a 401(k) plan, making it difficult to save for retirement through automatic payroll deductions. What’s more, 64% baby boomers today report moderate to high levels of stress about their retirement savings.

If not addressed soon, this crisis could result in a future in which many retirees heavily rely on government assistance programs. This strain on public resources could lead to increased taxes and budget deficits in the years to come.

Recent legislative changes

To combat the impending retirement crisis, the federal government introduced several new pieces of legislation in recent years, including the Setting Every Community Up for Retirement Enhancement (SECURE) Acts 1.0 and 2.0. Some states have augmented the SECURE Acts with state-mandated retirement plans. 

As these new laws aim to expand access to workplace retirement plans and boost individual retirement savings, they’ve introduced a host of new rules that affect plan eligibility, compliance standards, and plan designs. This is driving plan administrators to quickly adapt to the changing protocols and revamp their operations to stay compliant and profitable. 

Shifting sponsor expectations

To reduce the coverage gap, SECURE 2.0 encourages SMB employers to start new 401(k) plans by offering several incentives like tax credits and Pooled Employer Plans (PEP). Naturally, these initiatives have led to a surge in first-time SMB sponsors looking to set up retirement plans. But unlike larger enterprise organizations, they don’t have dedicated HR teams to execute these plans. As a result, SMB employers are searching for plan administrators that make sponsoring a plan as easy as possible. They are on the lookout for retirement solutions that can handle admin tasks and work seamlessly with their existing payroll tools—payroll integrations are the primary motivator for one-third of plan sponsors seeking to work with a digital recordkeeper.

In addition to painless administration, today’s sponsors have greater expectations when it comes to their 401(k) plans—they expect greater personalization in their retirement plans as well as a tailored and targeted experience for their employees throughout the life of the plan. This demand is likely to grow as tech-savvy Gen Z participants account for a larger and larger share of the workforce.

Key retirement industry trends to watch out for 

To effectively respond to the needs of the hour, plan administrators need to watch out the four major retirement industry trends we previously mentioned, which impact compliance, sponsor experience, automation, and connectivity. 

Trend 1: Compliance is going to be difficult

The first major trend that will affect plan administrators in the next few months is the increasing difficulty to stay compliant, owing mainly to SECURE 2.0.

SECURE 2.0’s focus on participant eligibility will push administrators to rethink how they handle compliance. For example, Section 101 of SECURE 2.0 mandates automatic enrollment for all participants, while Sections 125 and 603 introduce new criteria for part-time employees and catch-up contributions—making eligibility checks more critical and complex. 

This means more data will be shared between sponsors and administrators than ever before. Recordkeepers need to stay sharp on eligibility changes and set up automated workflows to quickly enroll participants to avoid falling out of compliance by accidentally leaving out newly eligible employees.

Note: Read our latest whitepaper to learn how plan administrators can use automation to improve compliance under SECURE 2.0.

Trend 2: Sponsor experience will be a top priority for recordkeepers and TPAs

The proliferation of SMB sponsors, coupled with the changing expectations of sponsors of all sizes, are driving a greater focus on customer-friendly retirement services and technology to gain a competitive edge in the rapidly growing retirement market.

Employers are going to pick retirement service providers based on the types of plan they support and how much of the administrative work they can outsource. Plan features like automatic enrollment, self-service tools, faster onboarding, payroll integrations, and on-demand customer support are going to be top priorities for sponsors.

Needless to say, recordkeepers and third-party administrators (TPAs) that offer significantly better service to their clients will win the long race of new customer acquisition and increased customer loyalty. However, this is likely to put a strain on the plan administrator’s Operations, Engineering, and Customer Success teams to improve user experience and operational efficiency. 

Trend 3: Automation will become key to efficient 401(k) plan administration

Under these circumstances, all plan administrators need to quickly scale their operations to keep up with the compliance changes and shifting sponsor expectations. They will be required to move on from the status quo of manual admin work and automate much of the day-to-day operations, from validating sponsor data and automatic enrollment to investing funds and automated deduction updates. In fact, studies show that 93% of advisors agree working with a tech-forward recordkeeper will make it easier to manage their plans.

Hiring to keep up with an increasing workload isn’t scalable or sustainable, so plan administrators will be driven to invest in technologies like API-based payroll integrations to operate more efficiently. The need for tools that provide reliable, accurate, and automatic access to participant and deferral data will continue to rise as manual data-gathering methods like SFTP fail to keep up with the rising automation needs of plan administrators.

Trend 4: Robust connectivity will play a crucial role

The U.S. retirement industry is witnessing a growing demand for better connectivity. Today, employers, as users, demand greater connectivity between the tools in their technology stack, including retirement systems. Our 2023 survey of over 1,000 HR professionals found that 97% expect their systems to integrate with other tools, and half of them feel stressed by switching between tools all day. 

Moreover, as technology evolves and new regulations like SECURE 2.0 focus more on participant engagement, it’s becoming increasingly important for sponsors, their payroll providers, and plan administrators to easily connect and share data in real time to simplify enrollment, investment monitoring, and drive engagement. 

These new demands will continue to push plan administrators to adopt new technologies that offer increased connectivity and streamline the user experience, even within a highly fragmented U.S. payroll market.

What’s next

SECURE 2.0 is only the beginning of a wave of legislative changes headed our way. According to predictions at this year's NAPA Summit, we can expect more significant legislation like the Automatic IRA Act of 2024 that’ll continue to shape plan requirements and eligibility criteria over the next decade, impacting everyone involved—from advisors and sponsors to TPAs and recordkeepers. 

It's a dynamic time for the industry, and staying informed and adaptable will be key for all stakeholders. Investing in new technology is the number one way for recordkeepers—and really, any business offering retirement services—to thrive in this evolving landscape. To learn more about these trends and get actionable tips on how to adapt, check out Finch’s latest whitepaper: The Changing Retirement Landscape: How 401(k) Recordkeepers Can Thrive Under SECURE Act 2.0.

Sponsor onboarding is one of the most critical touch points between a 401(k) recordkeeper and its customers because it sets the tone for the rest of the relationship. A frustrating onboarding experience can erode trust, leave customers dissatisfied, and in the worst cases, cause them to take their business elsewhere. Ideally, the sponsor onboarding process should be simple and fast, with minimal work required from the sponsor.

Yet most 401(k) sponsor onboarding processes are riddled with heavy paperwork, complex data-gathering requirements, and complicated workflows that spread across disparate teams and systems. File-based data sharing methods like SFTP add to the pain of onboarding sponsors due to their complicated setup process. API-powered payroll integrations offer a much more streamlined alternative, but they’re difficult to build and scale quickly, especially with limited resources. 

As a result, integration tools like unified APIs are gaining traction among recordkeepers as a go-to solution for scaling API integrations and optimizing the sponsor experience during and after onboarding. With streamlined onboarding, recordkeepers can ditch the lengthy approval processes, reduce sponsors' administrative load, and improve retention rates, strengthening their reputation as an employer-friendly solution.

As Drew Obston, Manager of Product Operations at Human Interest put it, “Sponsors shouldn’t have to get on more than five phone calls with their 401(k) recordkeeper and payroll provider just to set up a plan.”

In this article, we’ll explore how recordkeepers can overcome common onboarding challenges with unified APIs to offer a better experience to 401(k) sponsors.  

What does a 401(k) sponsor onboarding process look like?

Despite being manual and inflexible, many recordkeepers still rely heavily on SFTP to access employment data. Setting up the SFTP connection is a lengthy, expensive process with lots of back-and-forth between multiple parties. 

• Step 1: Request data access: Onboarding typically begins with recordkeepers requesting access to sponsor census and participant eligibility details housed in the sponsor’s payroll system. To access data files, they can either leverage a 1:1 API integration or set up a recurring SFTP connection with the sponsor’s payroll provider. When using an existing payroll integration, this is the first and last step; but setting up an SFTP connection involves several more.

• Step 2: Exchange details: Setting up a file-sharing process with SFTP involves several back-and-forth exchanges between recordkeepers, sponsors, and their payroll providers to share necessary details like data formats, PDI files, encryption details, and authentication methods. 

• Step 3: Involve the sponsor: In the traditional approach, sponsors are heavily involved during onboarding. First, they need to get approval from the payroll provider to authorize recordkeepers to access their employment data, which can cost them an additional SFTP setup fee of up to $20,000. Sponsors may also have to test and verify data files for mapping and formatting errors each time a file is shared during and after onboarding. 

• Step 4: Involve the whole team: Each onboarding step also involves dedicated resources from various departments within these stakeholders—Operations, Client Success, and Engineering. Normally, the Operations team initiates communication with the payroll provider and sponsor to handle the paperwork needed to authorize the connection. Once approved, the Engineering team builds and tests the SFTP connection, while the Operations and Client Success teams assist the sponsor in completing the remaining onboarding steps to finalize the process and enroll eligible participants.

All in all, onboarding that involves setting up an SFTP connection can take recordkeepers 4 to 16 weeks, depending on the complexity of the data and connection. 

Clearly, sponsor onboarding isn’t straightforward. When it comes to onboarding, recordkeepers are often at the mercy of the payroll provider. Recordkeepers are essentially helpless when it comes to expediting the process. Each step involves considerable manual effort and strong collaborations with outside parties—the payroll provider and sponsor. Recordkeepers need to rely on them to share approvals, data files, and technical support.

This over-reliance on outside parties can have hefty consequences for recordkeepers, from delays in revenue realization and a subpar user experience to the loss of valuable customers. Long, manual onboarding also frustrates sponsors, as it delays their ability to offer retirement benefits to their employees.

The importance of onboarding sponsors well

The importance of ensuring a fast and smooth sponsor onboarding experience cannot be overstated. It can help recordkeepers to:

• Fetch accurate data for the life of the retirement plan — A streamlined onboarding process with minimal manual steps and a user-friendly interface lets sponsors easily provide recordkeepers with reliable, continuous access to their payroll systems, ensuring the recordkeeper can pull accurate, timely data throughout the life of the plan. This also enables recordkeepers to enroll participants swiftly, comply with plan guidelines, complete investments on time, and meet Service Level Agreements (SLAs).
• Improve operational efficiency — Faster onboarding saves recordkeepers weeks of operational bandwidth and sets the Operations team up for smoother workflows down the road with minimal administrative overhead.
• Reduce Time-to-Revenue (TTR) — With a smoother onboarding workflow, recordkeepers can speed up plan setup and contribution processing. This ensures faster plan activation and revenue realization, ultimately benefiting both recordkeepers and sponsors. Accelerated onboarding also improves recordkeepers’ ability to compete for new businesses, which further boosts their revenue pipeline. 
• Strengthen relationship with sponsors — Self-service onboarding gives sponsors better control over access authorization and minimizes the need for manual intervention. It also helps recordkeepers make a positive first impression, improving user experience and boosting the chances of plan renewal.

Challenges of sponsor onboarding and how to overcome them

Despite the clear benefits of automated sponsor onboarding, many recordkeepers are still entrenched in the status quo. To truly amp up onboarding efficiency, they first need to address the key challenges that continue to affect the sponsor experience, such as:

• Data access complexities— Recordkeepers must overcome hurdles to access sponsor census and participant eligibility data, which is made all the more difficult by the disparities between different systems of record used by individual sponsors.
• Lengthy integration processes — Each time a new sponsor is onboarded, recordkeepers have to custom-build a new SFTP connection, which requires them to learn the process for a new system and takes months to get the connection up and runing.
• Over-reliance on third parties — Setting up an SFTP connection requires active engagement from the payroll provider and puts a huge administrative burden on the sponsor, both of which take control out of the recordkeeper’s hands.
  

The silver lining — Despite the critical challenges, there’s a silver lining for recordkeepers. In recent years, the emergence of integration tools like unified APIs has helped recordkeepers build and maintain direct API integrations at a significantly lower engineering cost. Unified APIs allow them to access data stored in multiple payroll systems through a single integration, meaning recordkeepers can onboard sponsors faster, without hefty administrative burden. 

That said, let’s look at the onboarding challenges and how recordkeepers can use unified APIs to overcome them. 

Data access complexities

As part of the onboarding activities, sponsors need to authorize access to their payroll system for the recordkeeper. However, accessing data from the employment system is harder than it seems. 

For instance, as of 2023, there are nearly 6,000 payroll providers in the U.S. Each provider has its own rules for storing and sharing data. Recordkeepers need to quickly grasp the data and security protocols of these providers and build the file formats—all within the onboarding period—to effectively access and share data with them. This takes technical expertise and can delay the onboarding process. 

Unified APIs, especially those specializing in payroll and HRIS APIs like Finch, offer a vast catalog of popular and long-tail payroll integrations. That means that recordkeepers can access data from any sponsor, regardless of the payroll system they use, automatically and in a standardized format—completely eliminating the need to build an SFTP connection. Automated integrations sync the data between the sponsor’s payroll and the recordkeeper’s system without any manual intervention.  Plus, unified APIs can standardize the data format across providers into a common model, so it always arrives in the recordkeeper’s system in their chosen format, regardless of the payroll provider’s preferences or standards.

Lengthy integration processes

Due to the complexity of accessing sponsors’ payroll data, building the file format to be shared via SFTP is a cumbersome process, requiring attention to detail and involvement from three distinct parties. Getting it right is critical, but it can also take up to four months—time that the sponsor could otherwise spend investing its employees’ assets (and time that the recordkeeper could be billing for its services).

When the recordkeeper has access to a pre-built API integration with the sponsor’s payroll provider, onboarding time can be reduced from months to minutes. Unlike SFTP connections, which need to be custom-configured for each sponsor, payroll integrations can be used by any sponsor using that payroll provider. All the sponsor needs to do is grant access permission to the recordkeeper, and voilá—the data can start flowing between the two systems. 

Over-reliance on third-parties

The standard onboarding workflow involves multiple parties, including the sponsor and their payroll providers. Collaborating across companies introduces the potential for delays and complications that are beyond the recordkeeper’s control.

Each payroll provider has their own protocols, standards, and requirements for establishing a data connection, which can make sponsor onboarding even more labor-intensive. And it’s not just the recordkeeper that has to manage these details—the sponsor is also heavily involved, adding unnecessary friction to their onboarding experience.

But when the recordkeeper outsources these connections to a unified API provider—especially one with formal partnerships with the payroll systems—there’s no need to go back and forth with the payroll provider. The technical bridge has already been built, meaning the recordkeepers have more control over the sponsor onboarding experience, and the sponsor’s involvement is minimal.

Simplify 401(k) sponsor onboarding with unified APIs

Establishing credibility as a recordkeeper begins with effectively onboarding plan sponsors. But let's be honest—onboarding sponsors is challenging. Simply put, if your integration process is inefficient and comes with high engineering and operational costs, speeding up sponsor onboarding becomes nearly impossible.

This is where integration tools like unified APIs come into play. Unified APIs provide the benefits of API integrations while substantially cutting down the time and cost required to build and maintain these integrations. Recordkeepers can simply leverage pre-built integrations provided by the unified API provider and onboard new sponsors faster

Take onboarding one step further with Finch

Finch provides a specialized unified API tailored for the employment sector. This means Finch understands the intricacies of employment data, provides granular access to payroll data, employs subject matter experts (SMEs) specializing in retirement and payroll solutions, and partners with leading payroll providers to further simplify the onboarding process for recordkeepers. 

With Finch Connect, an embeddable user interface (UI), sponsors can seamlessly connect their payroll systems in a few simple steps. Recordkeepers can initiate Finch Connect during the onboarding process, enabling sponsors to choose their provider, confirm permissions, and authenticate access in minutes—all within a user-friendly window.

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Once authentication is complete and the connection is established, recordkeepers can synchronize data with the sponsor's payroll system as needed without involving the sponsor. This removes the friction typically associated with traditional onboarding processes, speeds up the onboarding cycle, and enhances the sponsor experience. 

With this streamlined approach, recordkeepers can utilize their operational resources to focus on core onboarding activities, such as gathering additional information or providing product tutorials. 

There's more to what recordkeepers can unlock with Finch's Unified Employment API. In addition to faster onboarding, they can automate deduction updates and receive tailored support for specific use cases. Contact us to learn more. 

For recordkeepers and TPAs, handling annual 401(k) compliance testing is like steering through a maze of IRS and DOL rules. As stewards of these plans, they need to keep up with regulatory changes, employee census updates, and payroll deductions and accurately process large volumes of participant data without missing critical deadlines. 

This is as complex as it sounds, particularly when accessing employee data isn’t straightforward. Think of it like juggling multiple balls—you've got to be on your game to keep all the balls in the air and avoid any penalties along the way. The challenge is further amplified for plans with complex designs, like profit sharing or multiple investment options. As if that weren’t enough, recordkeepers and TPAs have to deal with the frustration of slow and error-prone manual data sharing methods. 

Traditional ways of handling employment data have long proved to be a hassle for plan service providers that slows down the efficiency of plan management including compliance testing. This has prompted recordkeepers and TPAs to actively seek new technologies, leading to the recent popularity of API-based payroll integrations.

APIs provide TPAs and recordkeepers with direct and immediate access to sponsors' payroll data. This not only simplifies compliance testing but also minimizes sponsor involvement in retirement plan management—enabling them to create a winning customer experience.

In this article, we’ll explore the concept of compliance testing, the limitations of traditional data sharing methods for effective testing, and how recordkeepers and TPAs can leverage payroll integrations to streamline the testing process.

Understanding 401(k) compliance testing

Sponsors have a fiduciary responsibility to guarantee fair and equitable benefits for all participants in the 401k plan. Each plan must pass four key compliance tests to ensure the plan doesn't favor higher-income individuals like business owners and top executives. The four tests are:

• Coverage test
• Actual Deferral Percentage (ADP) test
• Actual Contribution Percentage (ACP) test
• Top-heavy tests
  

The coverage and nondiscrimination tests (ADP and ACP) are annual assessments focused solely on contributions made within a specific year, while the top-heavy rules are evaluations based on the cumulative benefits accrued over time.

• Coverage testing ensures that a broad spectrum of employees benefit from the plan. It verifies that the retirement plan sufficiently covers non-highly compensated employees (NHCEs) in comparison to highly compensated employees (HCEs) and key employees. For plan administrators, this involves accurately assessing whether NHCEs are adequately included in 401(k) plans.
• Actual Deferral Percentage (ADP) testing checks if HCEs contribute within defined limits relative to NHCEs. 
• Actual Contribution Percentage (ACP) testing evaluates employer-matching contributions and voluntary after-tax contributions. The purpose of the ACP test is to confirm that the plan feature is actually used widely and not only by HCEs. 
• Top-heavy testing confirms that plans do not excessively favor key employees. Plan administrators must keep an eye on the plan’s overall structure to verify that the plan benefits all employees proportionally.
  

All plan sponsors are obligated to complete compliance testing unless their plan qualifies for the Safe Harbor exception. The success of a 401(k) plan in these tests hinges on the spread between compared groups falling within the specified range. If a significant discrepancy is detected, the employer must take corrective actions as outlined by the IRS in the 401(k) Plan Fix-It Guide. 

Common 401(k) compliance testing challenges

For third-party plan administrators and recordkeepers, compliance testing involves deep analysis and meticulous scrutiny of the plan and participant data. Delays or errors in these calculations can result in hefty penalties and additional matching requirements for plan sponsors. If you’re a recordkeeper or TPA, this is definitely not the sponsor experience you’d want to create for your customers.

Ensuring the data is accurate and received on time is a considerable challenge for recordkeepers and TPAs, primarily because they’ve traditionally been reliant on the sponsors or their payroll providers to send the data manually or through file-sharing methods like SFTP.

Exchanging data this way can present a slew of challenges, like: 

• Outdated employee details
• Incorrect employment data
• Lack of standardization across systems

Outdated employee details

Manual methods like SFTP can cause unnecessary delays in accessing required data. By the time a file is uploaded on the server, it’s theoretically out of date. Any changes that are made in the payroll system in between data dumps (which typically happen once following each pay period) are unknown to the recordkeeper or TPA until they receive the next batch of data. This delay may result in TPAs and recordkeepers missing important eligibility information or deferral updates and miscalculating the participation rate and contribution percentages of HCEs, NHCEs, and key employees, leading to inaccurate reporting.

Incorrect employment data

SFTP and other file-based systems often require ongoing manual intervention: if the sponsor is in charge of sharing data with the recordkeeper, they need to download data from their payroll system, format it appropriately, then upload that file onto a shared server. That much human intervention creates ample opportunity for errors like typos, mislabeled fields, and improper formatting. Since the quality of 401(k) compliance testing relies on the accuracy of this data, even small inaccuracies can lead to bad test results, resulting in fines, penalties, and extra work to fix mistakes. It also hurts the recordkeeper’s or TPA’s reputation and credibility.

Lacking data standardization

File-based data sharing methods don’t account for the lack of standardization across payroll providers, forcing recordkeepers and TPAs to spend resources extracting and standardizing the data before it can be used in compliance testing. In the diverse U.S. payroll market, where nearly 6,000 providers—each with their own unique data formats and fields—cater to small and mid-sized businesses (SMBs), standardization is key. This complexity leaves further room for error and draws out the testing process, risking missed deadlines.

Simply put, ensuring data quality and consistency can be challenging, time-intensive, and inefficient, especially when working with a year’s worth of sponsor data. Recordkeepers and TPAs need a better way of collecting this data at compliance testing time. This drives them to seek out more automated solutions like API integrations.

How API integrations improve 401(k) compliance testing

Application programming interfaces, or APIs, are tools that allow software applications to communicate and interact with each other. With API-based payroll integrations, data can automatically flow from the sponsor’s sources of truth directly to the recordkeeper or TPA—for each pay run.  

There are two types of payroll integrations: 180° and 360°. While 180° integrations only transmit data in one direction—say, from the payroll system to the recordkeeper—360° integrations facilitate data exchange in both directions. This means recordkeepers can update deductions directly in the payroll system without involving the sponsor.

360° payroll integrations offer several advantages in compliance testing. It helps recordkeepers and TPAs to: 

• Seamlessly sync employee census data throughout the year
• Keep track of employee deferrals
• Collect YTD data for end-of-year audits
• Improve the sponsor experience

Seamlessly synchronize employee census data throughout the plan year

Sponsors’ census data is changing all the time. Payroll integrations ensure that the recordkeeper or TPA is always holding the most recent employee information. Whenever employees are on- or off-boarded, receive promotions and raises, or change roles, that information is synced between the payroll system and the recordkeeper and TPA’s database.

This allows them to track HCE and NHCE contributions throughout the year and make necessary adjustments to ensure the plan will pass compliance tests.

Keep track of employee deferrals

In many plans, participants can change deferral rates at any time, which means the recordkeeper has to notify the sponsor so they can make the necessary adjustments within the payroll system. But with 360° integrations, the recordkeeper can automatically push deferral changes back to the payroll system without involving the sponsor at all. This ensures the changes are made before the next payroll and that the recordkeeper has the most up-to-date information regarding the employee’s deferral and potential matching contribution. 

Collect YTD data for end-of-year audits

Using API integrations, recordkeepers and TPAs can efficiently retrieve year-to-date (YTD) data from sponsors for end-of-year audits. This allows them to check the accuracy and completeness of data pulled throughout the year and make any necessary adjustments before the year’s end. Accessing YTD data through APIs simplifies 401(k) compliance testing by giving immediate insights into the year-long participant contributions and plan activities, which improves the accuracy of testing and regulatory reporting.

Improve sponsor experience

360° API integrations enable recordkeepers to enhance the sponsor's experience by reducing their day-to-day involvement in 401(k) plan management, minimizing administrative responsibilities, and eliminating constant back-and-forth through automated data transfer. Moreover, more automation leads to higher operational efficiency for the recordkeepers. 

Note: For a detailed understanding of how payroll integrations can streamline 401(k) plan administration, including compliance testing, read our article "Why Recordkeepers are Increasingly Turning to Payroll Integrations." 

Best practices for streamlining 401(k) compliance testing with 360° API integrations

For a 401(k) plan to pass compliance testing, it must be non-discriminatory and avoid being top-heavy. As a 3(16) fiduciary, recordkeepers and TPAs bear the responsibility of upholding the plan's financial integrity, meeting regulatory standards, and ensuring participants have a secure retirement savings experience. Proactive maintenance and regular updates of plan records mitigate the risk of test failure and eliminate the need for major adjustments at year-end.

To streamline compliance testing, recordkeepers can implement the following strategies that involve maintaining current data, conducting timely testing, and continuously monitoring the plan's performance:

• Use API integrations for seamless and secure data exchange
• Implement automatic enrollment 
• Regularly review plan participation and contribution data
• Adopt integration tools to scale payroll integrations

Use API integrations for seamless and secure data exchange between systems

Traditional file-based data sharing methods are manual, error-prone, and may require sponsors to perform routine work. API integrations, on the other hand, allow recordkeepers to access employment data in a fast, secure, and programmable manner—ensuring they always have all the data required for compliance tests.

Implement automatic enrollment to make it easy for employees to join 401(k) plans

With automatic enrollment, eligible employees are enrolled by default, shifting participation from opt-in to opt-out. Payroll integrations keep plan records up to date by enrolling employees as soon as they become eligible and boosting overall NHCE contributions, which increases the likelihood of passing non-discrimination tests (NDTs). Moreover, automatic enrollment helps administrators and sponsors comply with Section 101 of the SECURE Act 2.0 that mandates automatic enrollment in retirement plans.

Regularly review plan participation and contribution data

Recordkeepers and TPAs should regularly review sponsors’ data for accuracy to catch potential issues with the ADP and ACP tests early. While API integrations guarantee that they are receiving the data exactly as it appears in the payroll system, mistakes can still happen—the sponsor may have inadvertently added a typo or input data into the wrong field. 

But when recordkeepers and TPAs have access to all of a sponsor’s data—historical and present—at all times, it’s easy to perform routine checks to ensure the data is clean. That way, errors can be caught early and addressed before compliance testing deadlines roll around. They can also warn sponsors if the trend shows skewed contribution ratios at any time throughout the year.

Adopt integration tools for accessibility and scalability

While payroll integrations provide significant value, building and maintaining 1:1 integrations at scale can be challenging and costly. Payroll APIs are typically specific to each provider and may require in-depth knowledge of the application's functionality and API structure. This is why integration tools like unified APIs are gaining popularity among recordkeepers and TPAs. 

Unified employment APIs enable them to access data stored in multiple payroll systems through a single integration. Unlike their generalized counterparts, unified employment APIs are hyperfocused on the employment sector, which means they can offer more granular data access. For example, Finch’s Unified Employment API can fetch data as deep as individual pay statements. This level of detail makes it easy to check participant details such as earnings, tax information, and deductions.

It’s safe to say that relying on sponsors to manually share employee demographic, payroll, and plan contribution data over an SFTP server is neither efficient nor scalable for recordkeepers and TPAs that are looking to simplify compliance testing for 401(k) plans. As more employers seek integrated and technology-driven solutions, they are leaning heavily towards payroll integrations to automate critical steps in compliance testing—from automated data access and eligibility checks to boosting plan participation and managing deferral updates.

Simplify 401(k) compliance testing with Finch

Finch’s Unified Employment API can simplify compliance testing for recordkeepers and TPAs in several ways:

• Finch provides secure access to multiple payroll systems—covering 88% of the U.S. employer market—with a single integration. This helps recordkeepers and TPAs to effortlessly scale payroll integrations at a lower engineering cost.
• With direct integrations to the sponsor's system of record, TPAs and recordkeepers can speed up employer onboarding, auto-enroll newly eligible employees, and simplify deductions updates with minimal effort.
• Finch standardizes employment data across providers into a common data model that’s easy to understand and work with. 
  

There’s more to what Finch offers. If you're a retirement plan service provider managing compliance testing for multiple employers, consider adding Finch to your tech stack. Get in touch with us today to see how we can help.

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Like any regulated industry, the retirement field is thick with jargon and complicated nuance. Even pros that have been in the business for a long time have to keep up with ever-changing legislation and technology terms to stay ahead of the curve.

We've meticulously created this retirement glossary to be your go-to resource for mastering fundamental terms related to savings plans, compliance regulations, 401(k) payroll integrations, and beyond. Whether you need a quick refresher on common retirement terms or you're diving into the retirement industry for the first time, this guide will provide you with the knowledge you need to make informed decisions and strategic adjustments.

Let’s get started.

Fundamentals of Retirement

Plan Sponsor

Plan sponsors are entities, generally employers, that offer retirement plans to their employees.

Plan Participant

Employees contributing to and receiving benefits from retirement plans are plan participants. Beneficiaries or dependents who are nominated by the employee to receive benefits are also considered plan participants.

Plan Administrator

Plan administrators are the parties responsible for overseeing the day-to-day operations of 401(k) plans for participants and beneficiaries. While the employer could be the administrator, the work is often outsourced to a third party. Responsibilities of plan administrators include:

• Designing the plan
• Monitoring plan activities
• Compliance testing
• Providing customer support to plan participants (and, when outsourced, to sponsors)

Third-party Administrator (TPA)

Third-party administrators, or TPAs, are companies that provide qualified retirement plan administration services to employers. They typically oversee transactions, handle the documentation requirements and legal compliance of running a retirement plan, and offer guidance on the plan design. TPA responsibilities include: 

• Preparation of Form 5500
• Creating match and profit-sharing calculations
• Performing non-discrimination and other compliance testing
• Designing the plan and monitoring plan transactions
• Providing customer support to employers and employees

Recordkeeper

401(k) recordkeepers manage retirement plan records, including participant details, payroll data transfers (like employee deductions and employer matches), and notice distribution. They act as bookkeepers tracking funds, contributions, loan payments, tax deferrals, and rollovers. The recordkeeper is the employee-facing element of retirement plans, providing the website for participants to access their accounts. Recordkeeping services are offered either as standalone services or bundled with TPA services.

• Full-service recordkeepers (bundled) — Offer comprehensive 401(k) plan management, from design to administration to recordkeeping
• Recordkeeper only (unbundled) — Maintain plan records only, while other management services are handled by either the sponsor or other third-party advisors and administrators.

Custodian

The custodian for a 401(k) plan acts like a bank. They handle fund transfers, payments, and asset safekeeping in a 401(k) plan. They don't provide investment advice. While the plan administrator or a TPA monitors these transactions to keep compliant, the custodian is the entity that actually holds assets and invests the funds in a plan.

Key Employee

In 401(k) plans, key employees are crucial business figures with significant ownership or decision-making roles. According to the IRS, key employees must fulfill at least one of the following criteria:

• Ownership stake of 5% or more
• Ownership stake of 1% or more with annual compensation of $150,000
• Officer with annual compensation exceeding $215,000 in 2023

Highly Compensated Employee (HCE)

Retirement plan participants are divided into two buckets: highly and non-highly compensated employees. The IRS defines a highly compensated employee as any individual who either:

• Owned over 5% stake in the plan sponsor’s business at any time during the current or preceding year, regardless of compensation
• Ranked among the top 20% of highly paid employees in the company and received compensation exceeding specified dollar amounts in the previous year:some text
  • $155,000 for 2024
  • $150,000 for 2023
  • $135,000 for 2022

Businesses must identify HCEs for 401(k) plans to pass IRS-mandated non-discrimination tests and keep their deferrals within permissible limits. 

Additional Resources

What is a Highly Compensated Employee (HCE)?

Non-Highly Compensated Employee (NHCE)

A non-highly compensated employee or NHCE is any employee that doesn't meet the highly compensated employee (HCE) criteria required by non-discrimination testing.

Distribution

When plan participants withdraw funds from their retirement accounts, it's termed distribution. Most distributions are taxable by the IRS based on the participant's tax bracket. There are different types of distributions based on the type of retirement plan and the timing of the distribution. For example:

• Normal Distributions are withdrawals made by participants when they reach the retirement age specified by the plan, typically around 59.5 years.
• Required Minimum Distributions (RMDs) are withdrawals mandated from all employer-sponsored retirement plans and IRA-based plans when a participant reaches the age of 72. If the account holder doesn't withdraw the full RMD amount on time, they may be subjected to a 50% excise tax. However, SECURE 2.0 reduces this tax rate to 25%, and possibly even to 10% if the RMD is rectified within two years.
• Rollover Distributions are a special type where individuals withdraw funds from one retirement plan and deposit them into another. These are not subject to taxes.
• Periodic Distributions are regular payouts such as the monthly pension received by pension plan participants or beneficiaries.

Many rules govern retirement plan distributions, with financial penalties for noncompliance. For instance, withdrawing funds from a tax-advantaged retirement plan before reaching eligibility age often triggers penalties, except in select circumstances.

Rollover

A rollover occurs when plan participants transfer all or part of their 401(k) balance from a previous employer's plan to a new retirement plan or IRA within 60 days. Rollovers are typically tax-free unless the rollover is to a Roth plan. Typically, recordkeepers are responsible for overseeing rollovers in a retirement plan, making it simpler for employees to manage and track their retirement investments while offering greater control over assets. 

Vesting Schedule

While participants own their contributions immediately, employer contributions to qualified retirement plans often follow a vesting schedule defined in the plan document. This schedule determines when participants gain full non-forfeitable ownership rights to the plan assets. 

Employers implement vesting schedules to encourage employees to stay with the company longer. Typically, these schedules span three to five years, ensuring that all employees are fully vested by the time they reach normal retirement age or before the plan ends. 

Form 5500

Form 5500 is an annual document prepared by plan sponsors. It discloses sponsor details and organization data like participants’ legal names and employer identification numbers (EIN), and plan details like plan characteristics, assets, fees, and eligible employees to the IRS and Department of Labor. Sponsors usually hire TPAs for this job. Meeting this filing requirement is crucial to staying transparent and compliant with regulations.

Regulatory Frameworks

ERISA (Employee Retirement Income Security Act)

The Employee Retirement Income Security Act (ERISA), established in 1974, is a federal law that requires plan administrators to provide participants with information about the plan, comply with fiduciary responsibilities, offer legal protections, and more. The law mandates that plan providers uphold specific standards, such as:

• Clear communication of plan details to participants
• Minimum standards for participation, vesting, benefit accrual, and funding
• Procedures for participants to make claims and appeals to access their benefits
• Standards for fiduciaries managing plan assets to protect participants' interests
• Participants' right to legal recourse for breaches of fiduciary duty

Fiduciary Responsibility

Under ERISA, entities that are involved in retirement plan management—including plan sponsors, administrators, and investment advisors—must fulfill several fiduciary responsibilities:

• Acting solely for the benefit of plan participants and beneficiaries
• Carrying out duties with care, prudence, and diligence
• Diversifying plan investments and following plan documents 

Notably, fiduciary responsibilities only include the standards to be followed for carrying out the plan functions, not the results. For example, fiduciaries are not responsible for the degree of success of a plan investment as long as they ensure a well-diversified investment portfolio and follow a prudent process for documenting and communicating plan activities. 

Fiduciary

According to ERISA, a plan fiduciary is any entity that has discretionary authority and control over the management and administration of retirement plans and investments. Based on their roles, fiduciaries can fall into three categories:

• 3(16) fiduciary: A 3(16) fiduciary is a service provider hired by an employer to manage the day-to-day administrative work for a 401(k) plan. Any 401(k) service provider that elects to offer fiduciary administrative services can be labeled a 3(16) fiduciary. 
• 3(21) fiduciary: A 3(21) fiduciary provides advice about how the plan can invest its assets.
• 3(38) fiduciary: A 3(38) fiduciary has the authority to actually manage the investments.

SECURE Act

Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019, aims to address Americans’ lack of retirement savings by making retirement savings plans accessible to more employees. 

Updated in December 2022, SECURE 2.0 introduced several new rules to encourage wider plan adoption and enhance retirement security. Some of the mandates with the biggest impacts on 401(k) plan administrators are:

• Section 101: Automatic Enrollment—The legislation requires that every 401(k) or 403(b) plan created after Dec. 29, 2022, automatically enroll eligible employees in the plan with a starting contribution rate of 3-10% of the employee’s pay. The contributions are then automatically increased by 1% each year until they reach a minimum of 10%, but not more than 15%, of the employee’s pay.
• Section 603: Catch-up contributions— Section 603 requires employees aged 50 or older who earn more than $145,000 yearly to make catch-up contributions on a Roth basis—in other words, after taxes. This helps them boost retirement earnings by making them eligible for tax-free withdrawals at retirement.
• Section 125: Long-term, part-time employees— The original SECURE Act required employers to let part-time employees who completed 1,000 hours of work in their first year, or 500 hours of service over three consecutive years, join their 401(k) plan. Section 125 of SECURE 2.0, effective for plans starting after December 31, 2024, lowers the second time frame to two years. It also guarantees that eligible long-term, part-time employees have access to 403(b) plans that are subject to ERISA. Employees that qualify for a plan under Section 125 are entitled to a year of vesting service for every 12-month period in which they work a minimum of 500 hours.

Additional Resources

SECURE 2.0 Overview for Plan Providers

SECURE Act 2.0 Timeline

Section 603 Implementation Plan

401(k) Recordkeeper’s Guide to SECURE Act 2.0 Start-up Tax Credits

Non-discrimination Testing

Non-discrimination testing, required by the IRS, assesses whether all employees have equal access to a retirement plan. It requires that key employees and highly compensated employees (HCEs) stay within a specific contribution rate, which is determined by the contribution rate of non-highly compensated employees (NHCEs). Non-discrimination testing involves several assessments:

• Actual Deferral Percentage (ADP) Test—The ADP test compares HCEs' and NHCEs' average salary deferral percentages to ensure fairness in contribution rates. The ADP of HCEs must not exceed the ADP of NHCEs by more than two percentage points.
• Actual Contribution Percentage (ACP) Test— The ACP test is similar to ADP, but instead of assessing employee deferrals, ACP focuses on the employer’s matching contributions or employees’ after-tax contributions. 
• Top-heavy determination—If key employees hold over 60% of the total plan assets, the plan is considered top-heavy. Under top-heavy plans, the employer is required to pay a minimum of 3% of non-key employees' compensation to their 401(k) accounts.
  

Additional Resources

Non-discrimination Testing: 401(k) Compliance

Types of Retirement Plans 

Employer-Sponsored Retirement Plan

Employer-sponsored retirement plans operate by automatically deducting a portion of an employee's earnings from each paycheck and placing it into a retirement fund. Employers can also pitch in, either matching a fraction of the employee's contributions or making a fixed contribution. There are different variations of employer-sponsored retirement plans like 401(k)s, defined benefit plans, simplified employee pension (SEP), etc. These often come at minimal or no cost to employees and provide significant tax benefits to employers.

Defined Benefit Plan (Pension)

A defined benefit plan, more commonly known as a pension, is an employer-sponsored retirement plan that guarantees a specified monthly payout for employees at retirement. This can be a fixed dollar amount or calculated based on factors like salary and years of service. Most defined benefit plans are protected by federal insurance from the Pension Benefit Guaranty Corporation (PBGC).

Defined Contribution Plan

Defined contribution plans are voluntary employer-sponsored retirement plans that allow tax-deferred contributions from employees and employers. Each pay period, a fixed percentage of the employee's pay goes into their retirement account, with these funds being invested on their behalf. 

However, unlike defined benefit plans, defined contribution plans do not promise a specific benefit, and the plan's value can fluctuate based on investment performance. Examples of defined contribution plans include 401(k), 403(b), employee stock ownership plans, and profit-sharing plans.

401(k) Plan

Among all the employer-sponsored defined contribution plans, 401(k) is the most popular. 401(k) plans enable employees to save for retirement through payroll deductions. Employees can choose to defer a portion of their salary (up to a set limit) into the plan before taxes, which is then invested on their behalf. Employers may also match employee contributions, making it a valuable retirement savings tool.

403(b) Plan

While 401(k) plans are available to employees of for-profit, private organizations, 403(b) plans, also dubbed tax-sheltered annuity plans, are a defined contribution option for eligible employees in public schools, churches, and tax-exempt organizations under Code Section 501(c)(3). Like 401(k) plans, 403(b) plans allow employees to defer money from their paychecks, with the added perk of potential employer matching contributions.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

The SIMPLE IRA Plan (Savings Incentive Match Plan for Employees) is a tax-deferred retirement plan tailored for small businesses with fewer than 100 employees. Similar to 401(k) plans, employers have the option to match employee contributions that go into individual retirement accounts (IRAs) or annuities. However, SIMPLE IRA plans typically have lower contribution limits compared to larger employer-sponsored plans like 401(k).

Simplified Employee Pension (SEP) Plan

Simplified employee pension (SEP) plans offer employers of any size, including self-employed individuals, the opportunity to contribute to traditional IRAs set up for their employees. With lower start-up and operational costs than other workforce retirement plans, SEPs allow employers to contribute up to 25% of each employee's pay, up to a limit of $66,000 in 2023. Contributions are tax-deductible, and investments grow tax-deferred until retirement. Notably, SEPs only permit employer contributions.

Multiple Employer Plan (MEP)

A multiple employer plan (MEP) is a retirement savings arrangement where multiple employers participate in a single plan, typically sponsored by a professional employer organization (PEO) or an association. By sharing a common affiliation, such as membership in an association or engagement with a PEO, participating companies collectively enjoy several benefits, such as:

• Simplified reporting: MEP eliminates the requirement for individual Form 5500 filings
• Reduced audit requirements: MEP removes the need for annual plan audits
• ERISA bond protection is not necessary under MEP arrangements
• Lower costs due to outsourced administrative tasks

However, customization options are limited compared to single employer plans.

Pooled Employer Plan (PEP)

Introduced by SECURE Act 2.0, pooled employer plans (PEPs) are a variation of multiple employer plans (MEPs). In a PEP, participating employers delegate all administrative responsibilities to a designated pooled plan provider (PPP, or P3) acting as a 3(16) fiduciary. Unlike traditional MEPs, PEPs don't require participating employers to share a common affiliation.

Key Points:

• Shared resources and outsourced administration lead to cost savings
• Flexibility and customizability are limited compared to single employer plans
• Despite their potential benefits, PEPs are relatively new and face low awareness and adoption rates

Safe Harbor 401(k) Plan

A safe harbor 401(k) plan is a tax-advantaged retirement option that requires the employer to make tax-deductible contributions on their employees’ behalf, either through a match of the employee’s contributions or through a non-elective contribution. The funds must also be fully vested at the time of contribution. These plans help employers automatically pass the IRS-mandated non-discrimination tests and allow employees to contribute the maximum permissible amount to their 401(k) accounts. 

Roth 401(k)

The Roth 401(k) is an employer-sponsored retirement plan allowing contributions to be made after taxes. Contribution limits mirror those of traditional 401(k) plans, while qualified participants enjoy tax-free withdrawals upon retirement. 

Catch-up Contributions

Catch-up contributions, established by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), enable individuals aged 50 or older to exceed the usual contribution limit as they approach retirement. In 2023, eligible employees could contribute an extra $7,500 annually to qualified retirement plans like a 401(k) or 403(b).

SECURE Act 2.0 introduced new rules for catch-up contributions:

• Starting in 2025, individuals aged 60 to 63 can contribute an additional $10,000 or 150% of the standard limit, whichever is greater.
• Section 603 requires participants earning over $145,000 annually to make catch-up contributions on a Roth basis for tax-free withdrawals in retirement.

Additional Resources

How to Prepare for Section 603 of Secure Act 2.0: An Implementation Plan

Process Optimization Terms

Automated Payroll Processing

Automated payroll processing uses technology to streamline payroll calculations, management, and payment distributions. This modern approach to payroll offers numerous advantages:

• Reducing errors from manual data entry
• Ensuring timely payment to employees by eliminating processing delays
• Automating payroll deductions and contributions management to increase compliance
• Enhancing recordkeeping for auditing purposes

Error Handling or Plan Error Correction

Inefficient data handling practices can lead to errors in eligibility checks, documentation, or contribution management—resulting in compliance issues and penalties. Error handling or plan error correction involves identifying and rectifying all the inconsistencies in employer-sponsored retirement plans. For information on common 401(k) mistakes, solutions, and prevention, check out the IRS's 401(k) Plan Fix-It Guide.

Automatic Enrollment

Automatic enrollment is a mandate stipulated under Section 101 of SECURE Act 2.0 that requires employers to enroll eligible employees in qualified retirement plans by a specified date unless they opt out. 

Section 101 is effective beginning January 1, 2025, which means that 401(k) and 403(b) providers must soon put in place and test the technology they will need to automatically enroll and increase the contributions of millions of participants. Failure to do so correctly and on time could result in noncompliance, stiff fines, and legal fees associated with disputing any penalties in court.

Additional Resources

What Retirement Plan Providers Need to Know about Secure Act 2.0 Section 101

Eligible Automatic Contribution Arrangement (EACA) 

Eligible automatic contribution arrangement (EACA) is a method for automatically enrolling employees in 401(k) plans. Unlike basic automatic enrollment, EACAs:

• Require employers to notify all employees before enacting the plan's default automatic contribution percentage
• Allow employees to withdraw automatic enrollment contributions (with earnings) based on the plan's terms

Payroll API Integration Terms

401(k) Payroll Integrations

401(k) payroll integrations allow recordkeepers or plan administrators to access the data held within the sponsor’s payroll system and facilitate seamless data exchange between systems. Integrating payroll systems with 401(k) plans streamlines plan management by:

• Allowing 360° or bi-directional data synchronization, so plan administrators can automatically fetch and push deferral updates within the sponsor’s payroll system
• Enhancing data accuracy and plan efficiency 
• Maximizing operational efficiency by reducing the need for data reconciliation efforts and increasing responsiveness throughout the retirement plan cycle
  

Additional Resources

Guide to 401(k) Payroll Integrations

Secure File Transfer Protocol (SFTP)

Secure File Transfer Protocol (SFTP) is a method that uses shell encryption to securely send and receive sensitive information, like employment data, between businesses using a shared server. SFTP involves preparing data in a flat file format (like CSV or JSON), encrypting it, and then transmitting the files through a secure connection between two platforms. While SFTP is the most commonly used data-sharing method in the retirement industry, it requires a long, expensive setup process, cannot facilitate real-time data exchange, and is prone to errors caused by human intervention.

Application Programming Interfaces (API)

APIs, short for Application Programming Interfaces, act as bridges that enable communication between two different applications. They create a standardized pathway for two softwares—such as a payroll system and a recordkeeping platform—to exchange data and information, regardless of the programming languages they're built on. API integrations offer the same security as SFTP as well as near-real-time data access, but eliminate the need for time-consuming manual processes.

Additional Resources

SFTP vs API: Which Integration Method is Best for Employment Data?

Payroll APIs

Payroll APIs are simply APIs that are specific to payroll systems. They offer:

• Accurate transfer of payroll data to retirement accounts
• Real-time updates on contributions and deductions
• Automated tracking of employee retirement savings and loan status
• Simplified administration and improved accessibility for plan administrators, participants, and sponsors

Unified APIs

Unified APIs are a technology layer that provides access to many different applications and systems through a single API integration. Unified API providers sell pre-built connections to a multitude of applications within a category of software, meaning that users need only build one integration to the unified API provider to access the data within all of the systems the unified API has connections to. Unified APIs are standardized, meaning that all the data that flows through the API arrives in the same format, regardless of its origin. They’re an alternative to building dozens or hundreds of integrations in-house, which require high upfront capital investment, lengthy building periods, and long-term maintenance.

Additional Resources

Build vs Buy: Leveraging Employment Data Via HRIS and Payroll Integrations

Employment Ecosystem

The employment ecosystem is the collection of B2B software providers that employers use to manage their workforce. The ecosystem is vast, but any system that touches employment data is part of the employment ecosystem. These companies fall into 2 main categories:

• Employment Systems of Record: Employment Systems of Record are centralized sources of truth for employment records, usually owned by HR. HRIS and payroll are the two primary systems of record. However, for some applications, Applicant Tracking Systems (candidate) and Benefits Administration Systems (election, dependents, etc.) may also contain employment data needed for their use case.
• Third-Party Applications: These are SaaS applications that rely on employment data to function but primarily focus on additional services that help with human resource planning, management, and retention. Some examples include HR technology like talent management tools, employee benefits solutions, and finance applications like expense management tools.

Unified Employment API

A unified employment API is a vertical-specific unified API focused on the employment ecosystem. Unlike generalized unified APIs, unified employment APIs offer targeted market coverage, deeply granular data sets, and both read and write functionality to developers that require expertise in the employment ecosystem—along with the typical features of a generalized unified API.

These APIs are best suited for B2B products where the end users have administrative access to employment systems, such as HR admins, people operations professionals, benefits managers, or even finance team members. These users can then authorize a secure connection to key sources of employment data housed in their HRIS or payroll system. Developers can then leverage that data to create deeply integrated and personalized solutions for their customers.

Additional Resources

The Emergence of Unified Employment API

Authentication & Authorization

API authentication is vital in retirement technology to confirm users' identities when accessing sensitive employment data. Authentication is the process of verifying the identity of a user making an API request. It involves presenting credentials such as a username and password, API key, or digital token, which are then accepted or rejected.

Various authentication protocols, such as API keys, JSON Web Token (JWT), OAuth 2.0, user credentials, token-based authentication, and two-factor authentication protect sensitive data by reducing potential risks like data breaches, corruption, deletion, and denial of service (DoS) attacks.

However, authentication alone isn't sufficient for total security. It needs to be paired with authorization, which determines the level of access users should have based on their credentials.

Data Mapping

Data mapping is the process of reconciling data from different API endpoints to seamlessly sync data between systems. Even if two fields contain the same information, they might be named or structured differently. The process involves literally “mapping” two distinct data fields that hold the same information to one another, so the data can be automatically synced.

For example, when handling "employee address" in two different HRIS, what's referred to as 'location' in one system might be called 'residence' in another, causing confusion and making it harder to use the data. Data mapping involves training the API integration to recognize that the data held under ‘location’ in one system should sync with the data field called ‘residence’ in the other.

Data mapping can be tedious, especially when dealing with multiple APIs from different providers.  This is where a unified API can help—it lets vendors map data from different providers to one common model. Users can then request data from various providers without fretting over their differences.

Data Standardization

Data inconsistency among payroll systems can occur due to different data storage protocols followed by different providers. Data standardization normalizes data formats across endpoints to prevent loss of data due to mapping errors. Recordkeepers often opt for unified APIs for standardizing data obtained from multiple HRIS and payroll systems.

Data Synchronization

Data synchronization is the process of automatically updating data changes between two or more systems to maintain consistency. Frequent and timely data synchronization is vital for effective collaboration and compliance. Most automated API integrations sync data every 24 hours but will allow users to sync the data on demand.

Encryption

Encryption is the practice of disguising sensitive data in transit so it cannot be intercepted or accessed by unauthorized entities. In the retirement industry, end-to-end encryption protocols like AES 256-bit or TLS 1.2 are essential to safeguard sensitive employment data such as personal identifiable information (PII) and bank details and ensure compliance with data protection regulations.

What’s next?

Visit the Finch Blog to learn more about the best practices and trends shaping the retirement industry and discover what the experts are saying.

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We’re delighted to announce our new partnership with Oyster, a leading global employment solution. This partnership takes us one step closer to our vision of democratizing access to employment data by supporting innovators who are creating an integrated experience for employers.

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Finch is on a mission to empower innovators to build the next generation of employment technology. Through our Unified Employment API, Finch unlocks instant access to employment data from hundreds of HRIS and payroll systems with a single integration—making it easier for developers to build useful tools for employers. 

Partnering with like-minded platforms is vital for Finch's success, which is why we’re thrilled to team up with Oyster, a leading global employment solution for compliantly hiring, paying, and providing benefits to employees around the globe.

“We’re beyond thrilled to partner with Oyster. We share a vision of empowering employers who onboard and support people around the world with the latest technology. Our partnership will help us deliver amazing integrated experiences for employers and accelerate innovation across the employment ecosystem." — Runae Lee, Head of Partnerships at Finch

Oyster at a glance

Recognized as a Leader among global employment platforms by G2, Oyster is trusted by thousands of businesses. These businesses rely on Oyster to simplify and automate hiring, onboarding, payroll, and employee rewards processes as well as to develop sustainable global talent strategies. As a popular Global Employment Platform (GEP), Oyster is designed to meet compliance standards in 180+ countries, which makes it a lucrative choice for global enterprises. 

Employers love Oyster because it provides access to deep local intelligence that can be used to build a competitive global employment strategy and a single platform to hire, onboard, pay, and care for talent without the need to open a legal entity in multiple countries. This saves time and costs, reduces administrative burdens, and simplifies compliance requirements associated with global hiring, payroll, benefits, and more. 

Oyster integrates with several HR tools including popular HRIS and ATS tools to help employers build custom workflows and improve team productivity.

Oyster and Finch: Shaping the future of employment

Oyster is committed to assisting innovators in creating solutions for a connected future of work, aligning well with Finch's mission to unify the fragmented employment ecosystem. This partnership highlights our shared goal and dedication to advancing employment technology.

Navigating a closed Employment Ecosystem

The rapid growth of the HR tech landscape over the past decade has caused employment data to be dispersed and siloed across thousands of payroll and HR systems—causing inefficiencies and blocking innovation across the employment ecosystem. To create a seamless user experience, HR systems must be able to interact with one another and share information easily.

However, building integrations and forming 1:1 partnerships is an uphill battle that requires a considerable investment of time, money, and talent, both upfront and on an ongoing basis.

What the Finch + Oyster partnership means for the future of employment

By fostering a close relationship with Oyster, Finch continues its mission to democratize access to the employment ecosystem. Together, we aim to lessen the integration woes for developers and employers in several ways:

1. Enable developers to unlock employment data in minutes: For years, data silos have been a burden on tech applications in the employment space, requiring an outsized investment in building 1:1 integrations and siphoning resources from product-enhancing initiatives. 

With this new partnership, approved developers can use Finch’s unified API to seamlessly read data from Oyster, enabling innovative use cases and solutions. Businesses can now focus 100% of their efforts on building tools that help employers create a productive, engaged workforce. At the same time, by partnering with Finch, Oyster can expand its network of developers and accelerate innovation for SMBs. 

“Delivering an integrated experience to our customers is the driving force behind all of our partnership efforts at Oyster. Working with Finch is a great opportunity for us to simplify integration-based partnerships and encourage more developers to connect with Oyster, ultimately providing a better user experience for our shared customers. We’re excited to support innovation and tackle unique use cases across the employment tech space with Finch.” — Mark Frein, Chief Operating Officer at Oyster

2. Create an integrated employer experience: Employers are turning away from data silos and manual data entry practices and looking to invest in integrated experiences in the workplace. This partnership presents a great opportunity for developers to use Finch’s API to create a connected experience or embed Oyster’s global hiring functionality into their platform.

With Finch Connect, employers can now connect their Oyster accounts and start syncing data with other third-party applications in their tech stack in a fraction of the time—eliminating hundreds of hours each pay period required to manually assist HR workflows.

How the integration works

Developers who build B2B applications with Finch can now enable users to connect their Oyster accounts through a simple workflow that is baked into their application. Using Finch Connect, employers can safely grant permission to access data housed in Oyster to the third-party applications they use.

Finch Connect can be displayed at any point in an application’s customer flow and handles credential validation, multi-factor authentication, and error handling for each system Finch supports—including Oyster. With Finch Connect, employer onboarding time is significantly reduced compared to antiquated integration methods—making it simpler for Oyster users to onboard with any third-party platform they need. 

Once the employer has completed the process with Finch Connect, our Unified Employment API starts syncing data between the two platforms, enabling various use cases. By establishing data flow from Oyster to third-party applications, this integration can enable use cases like these: 

• Automated employee onboarding in training modules, dashboards, and directories based on criteria like start date or title
• Increased employee engagement through automated rewards and recognition triggered by milestones like anniversaries and promotions
• Simplified benefits eligibility checks and enrollment processes
• And much more

Learn more about Oyster’s API by visiting their integrations page. Or, if you’re building your Oyster integration via Finch, check our developer docs.

Unlock employment data with Finch

As the #1 Unified Employment API, Finch allows users to access organization, payroll, and deduction data across multiple payroll and HRIS systems, including Oyster, through a single integration. Talk to our sales team to learn how we can help.

If you’re an HRIS or payroll provider, increase compatibility with third-party applications by partnering with Finch. Contact us for partnership information.

The retirement industry is on the precipice of explosive growth. Alarmed by Americans’ lack of retirement savings, the US government has enacted new legislation to incentivize small businesses to offer 401(k) plans and to increase employee participation. Key to those incentives are the SECURE Act 2.0 tax credits.

SECURE Act 2.0 established three tax credits for small businesses that offer retirement savings plans to their employees—two of which are specific to plans established after 2022—including a credit that covers the startup costs of establishing a plan for the first time. 

This presents a golden opportunity for 401(k) administrators: there has never been a better time for small businesses to offer a retirement plan. Recordkeepers are in a position to capitalize on this push, leveraging the urgency SECURE Act 2.0 tax credits are driving among small employers to earn new business and increase revenue from existing customers.

In this article, we’ll cover the new requirements and tax credits of the SECURE Act 2.0, how they’re driving more small businesses to offer retirement plans, and what 401(k) recordkeepers and TPAs need to do to stand out and win these sponsors’ business. 

What are the SECURE 2.0 tax credits?

The Setting Every Community Up for Retirement Enhancement Act of 2022—better known as SECURE Act 2.0—aims to boost individual retirement savings and encourage employers to offer attractive retirement plans by reducing startup expenses. The three tax credits offered under the new provisions are:

• Employer contribution tax credit
• Startup cost tax credit
• Automatic enrollment tax credit

Employers that take advantage of all three tax credits could be eligible for up to $55,500 in tax credits in the first year alone—an enormous potential cost savings. 

The employer contribution and startup cost credits only apply to plans established after 2022; the automatic enrollment credit is also applicable to older plans. All three credits are only available to businesses with fewer than 100 employees.

Employer contribution tax credit

Sponsors offering new 401(k), SEP, and SIMPLE plans are eligible to receive tax breaks for employer contributions, up to a maximum of $1,000 per employee per year. Businesses with fewer than 50 employees can claim up to 100% of their contributions; larger businesses’ claims are reduced by 2% for every employee over 50. These credits can be claimed for up to five years; the percentage decreases each year by 25%, beginning in year three. 

Startup cost tax credit

Sponsors can also claim the startup and maintenance costs of new plans for up to three years. These credits cover 100% of plan costs for employers with fewer than 50 employees and 50% for employers with 51–100 employees. Sponsors can claim $250 for each eligible Non-Highly Compensated Employee (NHCE), up to a maximum of $5,000.

Automatic enrollment tax credit

This is the only credit that applies to retirement plans in place before 2023. Sponsors that incorporate automatic enrollment into their plans under the Eligible Automatic Contribution Arrangement (EACA) before the mandated deadline of January 1, 2025 can earn a $500 annual credit for up to three years.

‍Also read: Secure Act 2.0 Implementation Plan

How can 401(k) recordkeepers leverage SECURE Act 2.0 tax credits?

401(k) recordkeepers have an opportunity to take advantage of the urgency SECURE Act 2.0 is driving among small employers, both through compliance mandates and tax incentives.

Traditionally, small businesses have been less likely to offer retirement plans for a variety of reasons. In addition to the startup costs, small teams may be particularly concerned about the administrative burden of a retirement plan and intimidated by the stringent regulations that govern them. 

That means that while 401(k) recordkeepers can expect an influx of new sponsors seeking their services, they’ll need to be prepared to accommodate these sponsors’ unique needs to stand out among the competition and win new business and establish positive, long-term relationships with customers.

This all boils down to three key strategies:

1. Invest in the sponsor experience — Small businesses are just that—small. They have less bandwidth to take on the administrative burden that comes with managing a retirement plan. To avoid these additional complexities, 74% of small businesses do not offer a 401(k) plan to their employees. Recordkeepers can leverage this gap and win more deals by offering the easiest user experience.
2. Simplify compliance with auto-enrollment and eligibility checks — Retirement plans established after 2022 are subject to new regulations, some of which are already in place and some that will go into effect in January 2025. Sponsors will seek out providers that are best suited to keep them compliant and reduce their risk of incurring fines.
3. Offer world-class security — Retirement plans hold tons of sensitive data, so recordkeepers need to be prepared to demonstrate how they’re keeping sponsor and employee data safe.

Invest in the sponsor experience 

As a first-time sponsor, many employers are wary about the hassle of plan administration and the degree of resource involvement. To deliver a high-quality customer experience, recordkeepers need to ensure fast sponsor onboarding, ease of using the plan administrator’s service, and reduced administrative work for the plan sponsor. 

Traditional methods of pulling employee data and setting up data-sharing processes are highly time and resource-intensive tasks—leading to lengthy onboarding processes for sponsors. Employers need to spend hours on HR administrative work each pay period to keep the 401(k) running smoothly, which can negatively impact customer satisfaction.

Recordkeepers that want to take advantage of the new business spurred by the SECURE Act 2.0 tax credits will need to offer an alternative that minimizes the sponsor’s responsibility. Payroll integrations offer a solution—when the recordkeeper can pull data directly from the sponsor’s payroll and send changes in contributions and deductions back, much of the manual work is eliminated, which reduces the burden on both the sponsor and the recordkeeper.

These 401(k) payroll integrations, powered by APIs, are game changers—but they’re also expensive and time-consuming to build and require ongoing maintenance. Rather than trying to build integrations to multiple payroll systems in-house, recordkeepers can leverage unified APIs to gain access to a multitude of payroll providers in the time it takes to build just one integration.

Simplify compliance with automatic enrollment and eligibility checks

SECURE Act 2.0 set forth new requirements, including the auto-enrollment of employees and new eligibility criteria for part-time employees and catch-up contributions. Recordkeepers must be prepared to quickly and accurately check employee eligibility and enroll them in their sponsors’ plans to maintain compliance. 

All new retirement plans established after 2022 are required to have automatic enrollment enabled by 2025, meaning employees have to opt out of participation, rather than opting in. 401(k) recordkeepers that make it easier for employers to conduct eligibility checks and simplify the process of automatically enrolling employees in specific plans will win against the competition.

Also read: SECURE Act 2.0 Timeline for Retirement Plan Providers.

However, there are two issues that can make auto-enrollment problematic for plan administrators:

1. Data validation: Many recordkeepers and plan sponsors rely on manual data entry for enrolling employees in retirement plans, which is prone to error and leads to data inconsistency across platforms—making it difficult to conduct eligibility checks.
2. Timeliness: Manual methods of enrolling employees can also lead to missed deadlines and inaccurate contribution details, risking penalties for non-compliance.

Both of these problems can be solved by removing the element of manual data entry. Payroll and HRIS integrations give retirement plan providers real-time access to employee census and payroll data, allowing them to perform eligibility checks and automate plan enrollment based on information from the employer’s source of truth. When the payroll integration offers both read and write capabilities, the recordkeeper can also automatically update changes to employee deductions and employer contributions directly within the sponsor’s payroll systems—no manual intervention required.

Offer world-class data security

Retirement is a heavily regulated industry due to the sensitive nature of employment data, such as personally identifiable information (PII), bank details, and so on. Many small businesses starting 401(k) plans for the first time are concerned about ensuring compliance and safeguarding data. 

Although plan sponsors tend to delegate data cybersecurity duties to recordkeepers, they have a fiduciary duty to ensure that their recordkeepers follow maximum security practices. As a result, to win customer confidence, all 401(k) plan administrators need to ensure total transparency and comply with industry standards like SOC2 and HIPAA when dealing with employment data.

Once again, integrations can play a pivotal role here: because integrations eliminate the need for manual data-sharing through CSV uploads or SFTP, they incur less risk that sensitive data could be exposed. Unified API providers typically come with industry-standard security for data in transit and data at rest, offering peace of mind for both the recordkeepers that use them and the employers whose data travels through them.

Create best-in-class customer experiences with Finch’s Unified Employment API

SECURE Act 2.0 tax credits stand to drive many more small businesses to offer retirement plans for the first time. As a 401(k) recordkeeper, you have an opportunity to capitalize on this movement and win new business; but doing so will require a user experience that reduces the burden on sponsors and ensures compliance. 

Finch’s Unified Employment API can help by unlocking integrations to 200+ HR and payroll providers, covering 88% of US employers. That affords your team to focus your efforts and resources on providing innovative solutions for your sponsors. 

Talk to our sales team today to explore the ways you can use Finch to help small businesses start a 401(k) plan and take advantage of the tax credits afforded by SECURE Act 2.0.

Frequently asked questions

Which employers are eligible for a SECURE Act 2.0 tax credit?

Employers must meet the following criteria for employer contribution and plan startup tax credits:

• Have fewer than 100 employees who earned at least $5,000 in compensation in the previous year
• Include at least one Non-Highly Compensated Employee (NHCE) in the plan
• Have not provided retirement plans covering the same employees in the last three years

All new and existing 401(k) plans that add the automatic enrollment feature under EACA before the January 2025 deadline are eligible for a $500 automatic enrollment credit for up to three years.

Are businesses in MEP or PEP eligible for a SECURE Act 2.0 tax credit?

Yes, all eligible employers, including those in a multiple employer plan (MEP) or pooled employer plan (PEP), can avail the small business tax credits under SECURE 2.0.

Which plans are eligible for tax credit?

The following plans are eligible for small business tax credit under SECURE 2.0:

• SEP, or simplified employee pension 
• SIMPLE IRA, or savings incentives match plan for employees
• 401(k)
• 403(b)

What are the qualified costs for the startup cost tax credit?

Qualified startup costs refer to the essential expenses a small business incurs for:

• Setting up and managing a qualified retirement plan, including recordkeeper fees and third-party administrator charges
• Educating employees about the plan

The credit doesn't cover costs paid through plan assets or investment expenses. 

What is the best way to auto-enroll employees in retirement plans?

The most effective method for 401(k) plan sponsors and recordkeepers to automatically enroll participants into retirement plans is through integrations with the sponsor’s HRIS and payroll systems. Finch’s Unified Employment API offers access to over 200  HRIS and payroll providers, allowing automatic eligibility checking and enrollment based on employment data directly from the employer's source of truth. Contact us to learn more.

A lack of integrations between your product and other software-as-a-service (SaaS) tools can be a dealbreaker for potential customers. In Gartner's 2023 report, B2B buyers ranked integration with their existing tech stack as the third most crucial factor in provider selection. To stay competitive, companies are increasingly turning to integration partnerships.

Simple integrations aren’t enough. Today’s customers demand seamless data exchange, but they also expect customizability and that the features of each tool will work in harmony to create a whole greater than the sum of its parts. Integration partnerships lay the foundation for creating this kind of user experience.

In this article, we'll discuss everything you need to know about building successful integration partnerships—from how to choose the right partner and best practices to common challenges and how to overcome them. We'll also answer some frequently asked questions.

Let's dive in.

What is an integration partnership?

Partnerships don’t always involve integrations, and vice versa. Software providers can form partnerships with one another for a variety of reasons—to cross-promote their solutions or share resources, like splitting the cost of a co-branded industry report. Similarly, two companies can integrate their applications through an open API under developer terms and conditions governing use. 

An integration partnership is the combination of a formal business relationship and a software integration between systems. These partnerships can support stronger, more strategic integrations and formalize a working agreement between both companies that empowers both to grow.

Companies that offer distinct but complementary services and share the same ideal customer profile (ICP) will partner to blend services, technologies, and resources that make both products stronger and enhance the customer experience. This offers a distinct advantage over competitors whose products don’t work with the other tools in their customers’ tech stacks.

Often, integration partnerships also involve cross-promotion efforts—they may list each other on their product marketplaces, share leads, or establish referral programs to mutually grow one another’s business.

The benefits and business value of integration partnerships

A good integration partnership opens new revenue opportunities and fosters business growth for both parties in several ways:

• By accelerating business growth and expanding your total addressable market (TAM)
• Through reduced churn and increased product stickiness
• By leveraging deeper industry relationships to raise brand awareness 

Accelerate business growth

The ultimate goal of integrations and partnerships between SaaS applications boils down to driving more revenue, which is achieved through better products and an elevated customer experience. Integration partnerships can add to your bottom line in several ways:

• Mission-critical product integrations expand the total addressable market of one or both companies. For instance, Calendly expanded its TAM by integrating with Google Calendar, allowing the massive Google Calendar user base to leverage their calendar data, greatly improving the utility of the app itself.
• Integrations can help products to stand out among the competition—those that integrate with the existing pieces of their customers’ tech stack are more useful for new users, since the integrations make it easier to layer a new piece of technology into an existing tech ecosystem.
• Partnerships expand your market reach and build credibility through cross-promotion, marketplace listings, and referral programs with your partner. For example, if a customer uses ADP and is looking for a new 401(k) recordkeeper, they’re most likely to first look at the list of ADP partners on the integration marketplace since data needs to be shared securely and accurately between the two systems. 

Reduce churn and increase stickiness

Integrations help applications improve their product offering and automate workflows. This increases the utility of your app—making it integral to your customer’s tech stack and difficult to replace. 

For instance, tax credit platform MainStreet uses Finch to integrate with their customers’ payroll and HR systems, which allows MainStreet to programmatically pull the data they need from each customer in moments. This means the end user no longer has to get on a support call with MainStreet to integrate their payroll system, dramatically improving the user experience.

When two companies establish an integration partnership, they may be able to offer more useful integrations by collaborating on use cases and common customer requests.

Deepen industry relationships

Establishing strong partnerships with industry leaders can bolster your company’s reputation, potentially paving the way for future partnerships. These partnerships can include referral agreements that send leads to your company when your partner has a customer who would benefit from your solution.

Integration partnerships also lead to co-selling opportunities by creating a bespoke solution that combines both companies’ strengths. For example, last year Workday and ADP announced an extended partnership to improve data visibility between systems and provide a technology-first experience to their joint customers. 

The bottom line is that building integrations and creating strong, lasting partnerships can offer both direct and indirect benefits that will help your business to grow.

When should you consider integration partnerships?

Given their time and resource-intensive nature, whether or not to enter an integration partnership is a strategic business decision that should be made carefully and depends on how important the use case is to your ideal customer.

You should consider opting for an integration partner in the following scenarios:

• When you are losing customers or sales because your application lacks connectivity to the other tools your customers use
• When you need to quickly add support for a product feature that's not core to your business but is essential for attracting and retaining customers
• When there’s an opportunity to make your product more valuable by syncing seamlessly with a customer’s systems of record

Step-by-step guide to establishing integration partnerships

While the details may differ by industry, the general process for building integration partnerships is roughly the same. Here's what a standard integration partnership process entails:

Step I: Reaching out to potential partners

The first step is finding a potential partner and starting the conversation. Many vendors have an established partner program and an intake form on their website; others may require more direct outreach to Partnership or other company executives. Be prepared to explain what you’re looking to accomplish and how a partnership would benefit you both.

Step II: Negotiating terms of partnership

Next, you need to outline how you want to collaborate, which may include setting timelines and goals and agreeing to both technical and commercial terms. Some common conversations at this stage include:

• How both parties will measure success
• Partnership exclusivity
• Conditions for terminating the partnership
• The level of access and functionality available through the API
• How to address product updates and new versions of the API, and how those will be communicated
• If and how the companies will co-sell, cross-promote, or co-market their products

Step III: Legal discussions and contract submissions

Most companies will have a standard set of legal contracts, such as NDAs, licensing agreements, terms of use, privacy contracts, liability and indemnity clauses, and so on. These contracts clearly define ownership, intellectual property usage, and risk mitigation clauses.

Step IV: Building the integration

Once all parties are in agreement, the engineering teams can begin testing technical compatibility, synchronizing data, and building the integration. In some cases, developers can leverage an integrations platform like Finch to eliminate the need to build a bespoke integration and go live with their partnership in much less time.

Step V: Leverage the partnership

Now that the integration has been established, both companies can leverage the benefits of their new partnership, whether that’s through co-selling a robust solution, co-marketing the new integration features, advertising one another on their marketplaces, or whatever other benefits the partnership entails.

Best practices for forming and maintaining integration partnerships

Remember: integrations and partnerships are distinct, and they’re not mutually inclusive—one can exist without the other. Applications can integrate with each other without a formal partnership, and partnerships can be established without ever connecting technologies. 

When two companies form an integration partnership, they connect their applications and institute a formal agreement that leverages the integration to help both companies grow.

So, best practices for a successful integration partnership include best practices on both the technical side (the integration) and the business side (the partnership). The following best practices may apply on one end, the other, or both, as we’ll discuss below:

• Identify and assess the right integration partner
• Invest in your partner relationships
• Carve out revenue opportunities
• Onboard the partner
• Establish agreements about how both parties will maintain the integration throughout its lifetime
• Use tools to expedite building new integrations

1. Identify and evaluate the right integration partner

Integration partnerships require a lot of work to do well, so the first step is to choose the right partner—one that will offer long-term value to your business. 

To choose the ideal partner, you’ll have some considerations that are specific to the integration, some that are specific to the partnership, and some that apply to both. We’ll explore the best practices based on where they fall on each side of this coin. 

Both the integration and the partnership

• Objectives — Identify shared business objectives and how an integration would help both parties satisfy them. Understand how integrating the applications will provide a better user experience. Integrations that involve a partnership will need to benefit both parties, or there will be no basis for, or value to be gained from, a partnership. 
• ICP overlap — Partner with a company that offers a distinctly different solution than your own to a similar user base. Ideally, you’ll both be able to introduce new users to each other’s platforms through the integration partnership and address your respective TAMs more effectively.

Integration-specific

• Technical discovery — Consider the other company’s technical and resource requirements and confirm their technical setup, API type (like REST or SOAP), and the quality of API documentation. This ensures a smooth experience when building, maintaining, and using the integration.
• Integration difficulty — Once you have performed discovery and determined the level of effort, assess your bandwidth and capabilities to determine whether the project is feasible.

Partnership-specific

• Reputation — Evaluate your potential partner’s reputation in the industry. Analyze what their customers have to say about their reliability by checking reviews on sites like G2 and Capterra. Gather testimonials, check social media, and get a holistic view of their tool’s performance and their business values to ensure you’re partnering with a brand that reinforces your own brand values and reputation.
• Priority alignment — Ensure the other company is willing and able to engage in a lasting partnership. Discuss how you’ll help each other achieve your business goals once the integration is built.

2. Build relationships and appoint a Partner Manager

Once you’ve identified the right partner and both parties have agreed to work together, you’ll need to build trust to be effective partners. 

Large organizations recruit entire partnership teams to effectively develop and maintain relationships. If you’re a smaller organization without a dedicated Partnership team, start by assigning partnership responsibilities to someone who can own the relationship with the partner organization. These Partner Managers play a pivotal role in maintaining healthy relationships between the companies—they’re responsible for identifying opportunities to drive mutual revenue and user growth with your partner. 

3. Find revenue opportunities

There are two things to consider here: how the integration itself may be monetized, and how the partnership can lead to new revenue from customers.

Many SaaS tools charge direct and indirect fees to their partners, like API usage fees and flat partnership fees. In this case, one company or both may pay for the right to use the integration they’ve built. Be aware that while they’re common practice, API usage fees often lead to friction and frustration between the two parties. 

On the other hand, the business partnership may include agreements to promote each other’s products, with incentives like referral bonuses or customer discounts. These formal agreements can help one or both companies grow their user base at a lower customer acquisition cost. 

Separately, partners may engage in co-marketing commitments like co-hosting events, campaigns, and webinars, which typically don’t involve exchanging money. These collaborations can build mutual trust and goodwill while bringing each company new leads.

4. Set up a solid partner onboarding process

Partner onboarding can be helpful both for building the integration and defining the partnership. For example, you may exchange product walkthroughs so both you and your partner develop a better understanding of each product and how they can best work together before engineering the integration.

Once the integration is built, sharing enablement resources and marketing collateral as well as  establishing support paths can help each partner to effectively serve shared customers and engage in cross-promotional efforts. 

5. Establish a plan to maintain the integration over time

Integration partnerships, like any long-term relationship, require ongoing maintenance—both to the technical bridge and the human one. It’s good practice to assign dedicated points of contact to your partnerships—you may even establish routine meetings—to keep both parties on the same page about:

• Technical maintenance to keep integrations updated, fix bugs, handle versioning or user migrations, etc. 
• New products and services or shifts in focus and strategy
• Enablement opportunities like lunch-and-learns to strengthen the relationship and learn about each other’s offerings

6. Leverage a unified API to scale your integrations 

The dual nature of integration partnerships can make them especially taxing, because they require the effort of building the integrations and the effort of establishing and maintaining a business relationship.

Unified APIs like Finch can alleviate the strain on your team, empowering you to build integrations at scale. Instead of investing time, money, and resources in one-off integrations, companies that use Finch build just one integration to access hundreds of systems of record for HR and payroll. Finch’s Unified Employment API is intentionally focused on the employment ecosystem, but there are other unified APIs that serve additional markets and verticals.

Once you’re able to support connections to hundreds of providers through a unified API, you may choose to augment some of those connections with a formal partnership. In that case, unified APIs like Finch can speed these partnerships' time to launch by eliminating the technical element and giving your team the freedom to focus on building relationships and investing more heavily in your core product.

In short, you should consider a tool to leverage more integrations in the following scenarios:

• When customer data is falling out of date because you don’t have the necessary integrations to systems of record
• When your customers are forced to make manual updates to their data
• When you’re losing deals or churning customers because your integration coverage isn’t sufficient
• When you need to focus your engineering resources on core products and not integration work

Common integration partnership challenges

Finding the right integration partner that is collaborative and fits your strategic roadmap can pose several challenges:

• Lengthy negotiation process
• Technical checks
• API integration challenges
• Monetary burden
• Difficulty of scaling

Lengthy negotiation process

Negotiating legal contracts and commercial terms can take weeks or months to finish—often delaying time to market. This is especially difficult for startups or companies who want to go live with partnerships quickly and launch integrations with customers.

Technical assessment

Some companies may require their prospective partners to undergo technical evaluations to ensure compatibility, security compliance, and adherence to data protection standards—this is especially true of systems of record that hold sensitive data like PII. 

Many also require their partners to have a minimum number of shared customers before allowing them into the integration marketplace, which acts as a barrier to entry into the partnership ecosystem for early startups.

API integration challenges 

Most integrations are built through APIs. Integrating with a provider’s API is challenging for multiple reasons, including data mapping errors, API versioning, ongoing maintenance, and more. We expand on these hurdles in our article "Common Challenges of Building Multiple API Integrations."

Additional cost 

Integration partnerships are often a source of additional revenue for systems of record. As a result, partners may charge a flat fee or incremental fees for API usage—adding to the monetary burden for budget-conscious companies.

Difficult to build and maintain at scale 

A lot of time, energy, and resources go into building just one integration partnership. Companies that want to establish many integration partnerships face long timelines, tricky resource allocation decisions, and compounding long-term maintenance work—rendering it nearly impossible to scale without sufficient resources. 

Scale your integrations with Finch

Few companies have a surplus of time, talent, and capital. Invest those precious resources in your partnerships and product by using Finch’s Universal Employment API to access integrations to 200+ HR and payroll systems. 

Finch partners with industry leaders like Gusto, Paycor, Personio, UKG, and others, empowering innovators to focus on building their core product while leveraging our partner network to deliver a smooth user experience.

‍Talk to our sales experts or sign up for free.

Common FAQs

What makes integration partnerships successful?

Almost all successful integration partnerships involve the following:

• A clear value proposition and revenue-sharing model for long-term partnership planning and getting executive buy-in
• A commitment to technical support from each provider to ensure a smooth customer experience
• A demo environment to educate customers
• Co-marketing materials 
• (Preferably) Dedicated partnership resources

How long does building partnerships with top HR and payroll providers take?

Partnership efforts—identifying a partner, vetting them, developing outreach programs, building integrations, and implementing a shared go-to-market strategy—can take a few months to a few years.

Who does Finch partner with?

Finch is a unified employment API that helps you scale HR integrations faster. You can unlock integrations with 200+ HRIS, directory, and payroll systems by building and maintaining just one integration with Finch. Finch also partners with multiple HR and payroll providers your customers use, including Gusto, Paycor, Personio, UKG, BambooHR, HiBob, and more. By leveraging Finch's extensive network, you can save months of integration-building efforts and reduce time-to-market while creating a more integrated, seamless customer experience.

What are the technical requirements for an integration partnership?

Typically, integration partnerships involve:

• Application programming interfaces (APIs)
• Clear and concise documentation
• Data-sharing protocols
• A sandbox environment
• Security compliance checks
• Legal contracts

To protect their customer data, sometimes applications will decline partnership offers if data and security standards are not met. It’s crucial to ensure you meet the technical requirements, such as encrypting data in-transit and at-rest, before entering into a partnership.

Building SaaS integrations doesn’t have to feel intimidating; but let’s face it, it usually does. Many factors—from complex APIs to poor documentation—can make it tough for product teams to scale integrations.

In this article, we'll cover common obstacles SaaS companies face while building multiple API integrations and how to overcome them. 

But before we delve into that, let's first discuss what API integrations are and use an example to understand why they can be more complex than you think. (You can skip to the next section to jump quickly into the list of challenges.)

The complexity of multiple API integrations

APIs, or application programming interfaces, enable two applications to connect and seamlessly exchange data. APIs allow these systems to specify how requests are made and data is shared. The convenience of API integrations makes them a popular choice for SaaS developers.

However convenient, APIs are far from simple. Their complexity makes building and maintaining multiple API integrations challenging for engineering teams.

To understand this better, let's consider the HR and payroll integrations landscape. 

The need for multiple integrations in HR

Today, an average HR tech stack has seven or more employment systems of record, including human resource information systems (HRIS), payroll software, benefits administration platforms, performance management tools, and so on. 

The efficiency of HR processes depends on how effectively these tools communicate with each other. As a result, employers are increasingly prioritizing product integrations as a critical criterion before investing in any SaaS product to add to their HR tech stack. 

Therefore, if you are a developer, product manager, or owner of a SaaS tool in the employment tech space, your ability to remain competitive and close more deals depends on your ability to offer seamless integrations across multiple HR and payroll systems. 

The difficulty of API integrations

As of 2023, the U.S. has nearly 6,000+ HR and payroll providers. Many of these providers do not have public APIs. And the ones that do have hundreds of variations in their APIs, data formats, documentation, and integration protocols. 

Understanding different HRIS or payroll APIs and then planning, building, testing, and implementing dozens or hundreds of integrations can take months or even years and cost millions of dollars—not to mention the ongoing maintenance required for all the connections. 

These complexities apply to API integrations across all software categories, not just HR. In the next section, we’lldiscuss in depth what makes scaling API integrations a challenge for SaaS builders. 

Note: Meanwhile, if you are building multiple HRIS and payroll integrations, you should check out Finch's unified employment API. With Finch, you can unlock access to data from 200+ HR and payroll providers using just one integration. Learn more. 

Common challenges of building and maintaining multiple API integrations

Building API integrations is a complicated endeavor for several reasons. The primary challenges developers face are:

• Diversity and complexity of the API ecosystem
• Data mapping and consistency errors
• Security and compliance issues
• Integration partnership challenges
• Third-party API updates
• Integration maintenance problems

Complex API Ecosystem

Developers find it increasingly difficult to build integrations with a diverse set of APIs for several reasons, such as negotiating lengthy partnership contracts, testing integrations across multiple environments, the cost and complexity of scaling product integrations, and much more. Let’s examine these issues in detail.

Diverse APIs

While APIs make it easier to connect two systems, the diversity of API providers and integration procedures makes it a nightmare for developers to build multiple API integrations. 

Each API provider has different systems built into the API. They may use different technologies, error-handling mechanisms, or rate-limiting protocols and can also have unique data formats—making it further challenging to facilitate seamless communication between them.

Gated APIs and integration partnership challenges

Not all APIs are open for anyone to use—gated APIs require partnership agreements to access 

their API keys, documentation, and sandbox environments. The companies that enter these agreements have to undergo security checks, lengthy negotiation processes, and, in some cases, pay additional fees—rendering partnership agreements extremely time and resource-intensive. 

Some providers even require a minimum customer count before entering a partnership agreement, posing additional challenges for resource-limited startups that need product integrations to grow their customer base.  

Testing across multiple environments

Building API integrations in-house means ensuring each integration runs as intended and is reliable. Testing is crucial to check the stability of each integration and whether it can handle varying data loads under different use cases.

The problem with API testing is twofold:

• First, every API provider may not offer testing environments to build against, requiring developers to figure out how to test in production with real customer data.
• Second, testing integration against a provider system requires a thorough understanding of how that system behaves, how it defines data, and so on. It requires specific knowledge and expertise that may not be available to a typical SaaS product/engineering team. It can take weeks for a developer to understand the nuances of API testing for a specific provider. 

Neither of these options allows SaaS product teams to move quickly.

Scalability issues

It’s important to remember that all of the challenges we’ve mentioned apply to every API integration, and most SaaS companies need to integrate with dozens of systems in their space. Scaling your company’s integration catalog is a challenge. Here’s why:

• First, building multiple SaaS integrations is time-consuming and resource-heavy. Developers must decode each API, understand documentation and data schemas, write custom codes, and test and implement the integration. Building just one integration—from planning to implementation—can take a few weeks to a month and thousands of dollars. If you have 20, 30, or a hundred integrations to build quickly, it’s definitely not a viable option. 
• Second, developers’ work is not finished once the integration is implemented; they then need to spend their valuable time maintaining these integrations and optimizing their performance. 
• Third, integrations are not a core product feature for most SaaS tools, yet integration with customers' existing tech stack is essential to remain competitive and reduce churn. Building dozens of integrations can take valuable time from the engineering team, which could be spent enhancing your core product. Developers often deprioritize integration-related tasks to work on core products or vice versa. Neither benefits the bottom line. 

Note: Finch not only makes it easy to scale HR and payroll integrations quickly but also offers a sandbox environment for select providers to give developers a safe test environment. Visit Scale with Finch.

Data-related challenges in API integration

The complexity of diverse APIs also poses to data mapping and consistency for integration builders.

Data mapping and normalization

Normalizing data from multiple systems of record is not an easy task. Here’s why: 

• First, different providers store data in different formats. They may provide the same information but return it under fields with different names in varying formats.
• Second, some providers may not offer the data developers need in a simple format. For example, they may not pre-calculate the values that are required. It forces the developer to collect and calculate values themselves—adding to the complexity of the API integration process and elongating the timeline for completion.
• Third, different systems may use different types of APIs. Some providers use SOAP APIs instead of the more common REST APIs. As a result, developers spend more time learning how to integrate in new ways they may not have experience with. This delays integration shipping time even further.

Developers can save hundreds of hours when provided with data in a standardized format. This abstracts away the additional complexity of mapping data in different formats from different systems of record each time a sync happens.

Data consistency and accuracy

Ensuring data quality and integrity is crucial to avoid compliance and security issues as well as to minimize errors in data processing. Data quality in API integration is measured by its accuracy, timeliness, and consistency across multiple systems. 

Considering the complexity of data mapping, it is clear that maintaining data quality while building multiple API integrations is a challenge for SaaS product teams.

Establishing clear data standards and validation checks is essential to address this challenge. Also, using a tool to normalize data can bring the dual benefit of ensuring data accuracy and standardization.

For instance, Finch acts as a single source of truth for HR and payroll data, regardless of where the data comes from. As a unified API, Finch normalizes hundreds of variations in employment data into a standard format. Thus, making it easier for developers to read updates and write changes into the employers' primary HR tool—while maintaining data accuracy and completeness.

Security issues in API integrations

Security challenges in API integration include unauthorized access, denial-of-service (DoS) attacks and excessive data exposure.

Data security and compliance

Every organization, regardless of its size, is wary of safeguarding and sharing its data. This is especially true for sectors dealing with sensitive information such as financial data, employment data, or health records. 

While it may be manageable to establish and monitor security standards for one or two integrations, it’s nearly impossible to continuously monitor security health for a dozen or more integrations without dedicated resources. 

Another solution is to use dedicated integration solutions like unified APIs or iPaaS that are compliant with global standards for security practices like CCPA, SOC2, GDPR, ISO27001, HIPAA, and so on.

Authentication issues (401 unauthorized errors)

Another security issue in API integrations is broken authentication or broken function-level authorization. Authentication errors return an HTTP error code 401. 

Complications can also arise from different authentication mechanisms like OAuth, API keys, and access tokens used by different API providers. Developers must familiarize themselves with multiple authentication protocols and implement custom processes for each API integration they build.

For example, if you are building multiple HRIS or payroll API integrations, you must carefully build and manage authentication and authorization. Any unauthorized access or erroneous permissions can lead to disastrous consequences for your end users—employers and employees.

To account for this, Finch's unified employment API not only supports different authentication protocols but also makes it easy for end users to authorize access control. With Finch Connect, employers can select their choice of HRIS and payroll providers and authorize permissions in less than 30 seconds. Learn more about Finch's security practices here.

Challenges of keeping up with third-party APIs

Two of the most common struggles for developers building multiple third-party API integrations are inadequate or incomplete documentation and backward incompatibility.

Documentation discrepancies 

Documentation discrepancies in API integration are multifold. For example:

• Some providers do not make their documentation publicly available, restricting it to approved partners only. 
• The documentation may not be clear and concise, requiring developers to spend more time finding necessary information. Sometimes, the API documentation may not be available in your preferred language.
• Documentation may not be updated with the latest API versioning changes. 

API versioning and backward compatibility

APIs are not static—they’re updated over time. API version changes can break the existing integrations or lead to broken endpoints and consistency issues. Therefore, it’s crucial to ensure each API integration has backward compatibility—in other words, they continue to perform even when a new version of the API has been released. 

In our experience, developers often find it difficult to contact the API providers when a documentation page returns an HTTP 404 page not found error or a versioning change returns HTTP 301 error code.

To effectively manage API versioning, developers need to create flexible codes for the integrations that can adapt to API version updates and remain functional. They also need to have communication and support plans in place with API providers to stay updated about version changes and preemptively adjust integrations.

Note: Finch makes handling third-party API integrations easier for HR integration developers. For instance:

• Finch maintains up-to-date, standardized documentation across providers. It helps developers save themselves the time and effort of dealing with varying quality API documentation by different providers.
• Finch adjusts for API version updates for all the integrations on its end, so your developers don’t need to keep tabs on the status of multiple APIs. Check out our developer documentation for more details.

Integration maintenance challenges

Maintaining dozens of integration maintenance indefinitely is a monumental task. You need to constantly monitor the health of each integration for performance issues, error resolution, and rate limits. Let’s examine these issues in detail.

Rate limiting (HTTP 429 error) and throttling

API providers sometimes impose API rate limits and throttling to control the number of API calls, prevent over-usage, and maintain integration stability. This returns an HTTP 429 error code. 

To avoid being rate-limited, developers must monitor API usage carefully or use webhooks to receive notifications instead of polling the API connection excessively. Adjusting for rate limits is doable for a few integrations but adds to the complexity of scaling.

API monitoring and error handling 

Building integrations is only one part of the equation. Another hurdle is maintaining them for optimum performance on an ongoing basis. Integration performance depends on the time it takes to sync data, the accuracy of the data synced, frequency of errors, and the time it takes to resolve them. 

Ensuring reliable integration performance is tricky. API integrations can fail, break, or malfunction for several reasons, such as incorrect parameters, server errors, and network issues. It can also fail due to third-party provider issues such as API versioning or any incident or outages that impact their APIs.

As a result, developers need to continuously monitor these integrations individually. Diagnosing and solving integration performance issues also requires knowledge of the specific API and its nuances. Monitoring individual integration can be difficult, especially when you have dozens of integrations running simultaneously and a relatively small engineering team. 

Given that poor integration performance is one of the leading causes of SaaS customer churn, SaaS companies must identify errors on time and promptly resolve them. 

For this reason, SaaS builders are increasingly opting for unified APIs like Finch as a go-to solution for scaling customer-facing integrations. Unified APIs allow developers to build and maintain one integration and unlock access to data from hundreds of applications. It’s always easier to deal with one API integration than the nuances of dozens of APIs.

If you are building three or more HR and payroll integrations, consider checking out Finch unified employment API. Connecting with Finch can unlock integrations with 200+ HRIS and payroll providers—covering 88% of the U.S. employer market. 

Throughout this article, we have discussed how Finch solves the common challenges in API integration. With more than five million API calls every day and tens of thousands of employer connections, Finch is the trusted HRIS and payroll API solution for several B2B applications. 

You can learn more about Finch by booking a call with one of our experts. We would be happy to discuss your specific integration needs.

We are thrilled to share that GGV Capital U.S., in partnership with Crunchbase, has named Finch in its Fintech Innovation 50—a list highlighting the rising stars in the fintech sector. It is another notable achievement for Finch after last year's recognition in GGV's inaugural Embedded Fintech 50 list.

GGV Capital's Fintech Innovation 50 reflects the continued trust of the investors in the fintech industry—including financial infrastructure, lending, AI, and more. In celebration of the launch, the honorees were invited to ring the opening bell at the Nasdaq Marketsite this morning. 

Finch, a unified employment API, is committed to increasing connectivity in the employment data ecosystem and providing fintech firms with greater data access. 

"Time and time again, we have seen how data silos across HR, payroll, and benefits systems have stunted organizational growth and technical innovation in fintech. Our goal is to simplify secure access to employment data. GGV Capital's recognition motivates us to continue improving connectivity, innovation, and automation in the employment-fintech ecosystem,” said Jeremy Zhang, CEO and Co-Founder of Finch.

For the 2024 list, 150 companies were nominated by 44 investment firms. The firms submitted an equal number of portfolio and non-portfolio companies and voted on the aggregate list. The nomination criteria included companies with the following:

• A primary focus on fintech
• The U.S. as a primary market
• Series A financing or beyond

Here is the complete list of Fintech Innovation 50 honorees, the methodology, and participating investors.

Even amidst the uncertainties looming in the fintech sector in 2023—including decreased valuation and increased interest rates—these emerging and established players ignited possibilities in the eyes of startup investors. 

"Despite a rocky 2023, the list celebrates the innovation, perseverance, and the future potential of fintech," said Hans Tung, Managing Partner, GGV Capital U.S. "We believe the long-term tides are in fintech's favor with disruptors and value-added enablers like the Fintech Innovation 50 honorees leading the charge."

Finch is a universal API for employment data. We are working to provide innovators with mission-critical employment data, including read and write compatibility with 200+ employment systems (HRIS, payroll, directory). If you are driving innovation with employment data, get in touch with us.

HRIS integrations are crucial for streamlining essential HR functions such as employee onboarding, performance management, benefits administration, compliance, etc. They also support broader business operations like accounting and enterprise resource planning (ERP).

Integrating operational tools with HRIS systems can eliminate the need for employers to switch between different applications. It also boosts the adoption of new SaaS tools and minimizes manual data entry errors.

In this article, we will explore what HRIS integrations entail, discuss popular use cases, and examine both the challenges and benefits associated with them. We will also touch upon the common methods for building and maintaining these integrations.

Additionally, we'll introduce how Finch allows you to unlock integrations with 200+ HR and payroll systems using just one API. Tools like Finch are especially valuable when dealing with the complexity of building three or more HRIS integrations.

What are HRIS Integrations?

Today, an average-sized organization utilizes 6-8 HR applications. This requires employees to spend significant time keeping their employment tech stacks up-to-date. Based on our research of 1000+ HR professionals, seven in ten HR admins (68%) say they routinely switch between different employment systems throughout the day. Half (51%) admit doing so leaves them feeling overwhelmed, stressed, annoyed, frustrated, or angry. 

HRIS integrations facilitate seamless data exchange between the primary HRIS (housing employment records) and other software applications. This means that any changes made in one system will automatically appear in another, and actions in one application can trigger workflows in another. This reduces the need for employees to switch between apps frequently.

Types of HRIS integrations

HRIS integrations fall into two main categories based on their purpose. 

• They can be customer-facing and connect your application with a third-party HRIS used by your customers. Employers can authorize your tool to exchange data with their HR systems. For example, whenever a new employee joins an organization, a sequence of onboarding activities must be completed—from enrolling their details into payroll and benefits systems to completing onboarding training and providing access to key business tools. With HRIS integrations, all of these can be automated. 
• Alternatively, HR integrations can be developed for internal use within an employer’s org. This facilitates seamless data sharing with business tools like ERP, accounting, or communication systems. It reduces unnecessary app-hopping for employees and HR managers. For example, you can integrate your HRIS or HCM system with Slack to send automated reminders.

Top HRIS Integrations

HR and payroll represent one of the most fragmented markets in the United States, boasting nearly 6,000 providers processing around $3 trillion in payroll annually for SMBs alone!

Adding to the complexity, the functionalities of HR systems vary widely among different providers. Some offer only HRIS or employee directories, while others provide a comprehensive suite encompassing HRIS, payroll, benefits, and collaboration tools.

As of 2023, Quickbooks, ADP Run, and Paychex Flex collectively hold over 40% of SMB payroll  market share. However, newer tools like Gusto, Zenefits, and BambooHR leverage innovation and integrations to offer diverse HR, payroll, and benefits solutions to SMB employers through a single platform.

Note: Given the abundance of HR and payroll providers, it's essential for any company serving the SMB market to integrate with as many HR providers as possible. 

Building a few integrations with the top five or ten HRIS may cover a decent portion of your customer base, but to serve the remaining half or tap into new regions and industries, you would need to build hundreds of other HRIS integrations. Needless to say, this is tremendously time and resource-intensive. 

To address this coverage challenge, many employment tech companies seek solutions to streamline the development and management of HRIS integrations. If you're developing a solution that requires access to employment data from multiple sources, Finch’s Unified Employment API can unlock hundreds of HRIS integrations in as little as 3 days. Contact us.

Now, let's explore some common use cases of HRIS integrations.

Common HRIS Integration Use Cases

Payroll

Integrating an employer's HRIS with a payroll provider is the most efficient approach to handling payroll functions efficiently. Especially when an employer’s HRIS does not include a payroll module. This integration automates tasks such as setting up new employee payroll, tracking tax regulations, and managing benefits deductions based on employee directory data. 

401(k) and retirement plan providers

Providers of 401(k) plans, record keepers, or third-party administrators can integrate with an employer's HRIS and payroll systems. This integration streamlines auto-enrollment to retirement plans, facilitates seamless deductions management and yearly recordkeeping audits.

Benefits administration

If an HRIS lacks benefits administration features, employers can connect with a benefits administration tool to automate employee enrollment, modifications, and cancellations. Learn more.

Talent acquisition tools

Recruitment tools, like applicant tracking systems (ATS) or background verification tools, often collaborate with HRIS’s to offer all-in-one talent acquisition solutions. This enables employers to manage recruitment tasks from a single platform. For instance, when a candidate's status changes to "Hired" in the ATS, HRIS integrations can automatically create the employee profile and trigger onboarding functions.

Compliance and security

Compliance tools can use employee census details (job title, department, employment status, etc.) to build security training programs, auto-enroll employees, send periodic reminders, and update results directly to the HRIS, ensuring increased participation.

Also read: How Secureframe used HRIS integrations to simplify compliance for thousands of employers.

User provisioning & de-provisioning

Tools like compliance, expense management, employee recognition, and identity management must stay updated with the latest employment details for accurate employee access. HR integrations ensure accurate access to employee records, making it easy to grant or remove user access to essential tools. This maintains compliance and reduces the risk of data leaks.

Employee onboarding & offboarding

As soon as an employee joins, a series of onboarding workflows ensure that employees have access to all the equipment, software, and documents they need to get started on their first day at work. Effective employee onboarding also includes company orientation, training, and in some cases, specific certification processes. HRIS integrations automate these workflows by swiftly capturing employee details, eliminating the need for manual ticket generation. The same automated efficiency applies to the triggering of offboarding workflows.

Read: How tools like Trainual simplified employee onboarding with HRIS integrations. 

Time tracking and leave management

Time tracking and leave management applications use HRIS integrations to automate hours worked and time off updates based on employee census data. This reduces HR admin workload by eliminating manual data syncs.

Employee engagement and performance management

Integrating workforce management solutions with HRIS’s creates a centralized platform for daily tasks and performance management. For instance, HRIS integrations help employee engagement and performance management tools to track employment information like employee roles, organizational structure, manager information and use them to trigger relevant workflows.

Read: How employee rewards tool PerkUp launched HRIS integrations in a sprint.

Personalized employee learning

Integrating learning management systems (LMS’s) with HRIS’s simplifies managing the professional development of employees. Customizing their learning experience based on employee data, such as role, department, and manager details, facilitates skill gap identification and discovery of training needs. Moreover, completion reports are automatically sent back to HRIS, allowing employers to stay informed about employee learning without manual effort. For example, with an LMS-HR integration, employees can be auto-enrolled in role-based learning programs following role changes or promotions.

Internal use cases of HRIS integrations

• Communication and collaboration tools: HR integrations with communication and collaboration tools like Slack. Microsoft Teams, Zoom, Dropbox, etc., can streamline organizational communication, such as quick announcements, file sharing, and other important team updates. 
• ERP: Organizations often build HRIS integrations with their enterprise resource planning (ERP) tools to share employee census data with other business tools like finance, operations, and accounting systems. This facilitates collaboration between different business units. For example, with integrated systems, HR and accounting teams can access real-time data. This allows for quick and accurate reporting on financial metrics related to payroll, expenses, and budgeting. Some external ERP or accounting tool offer HRIS integration for this purpose. 

Read: How accounting software Rillet leveraged HRIS integrations for better employer experience.

How to Build HRIS Integrations?

The most effective approach to building HRIS integrations depends on the number of integrations needed, the purpose of integration, scalability needs, engineering bandwidth, and budget. Common HRIS integration methods used by SaaS tools include:

Custom API integrations

Application programming interfaces or APIs serve as connectors for seamlessly exchanging information between different software tools. Custom-built API integrations simplify setting up automated triggers for custom HR workflows. APIs offer greater flexibility, personalization, and customization of the end-user experience. However, each integration requires significant development and partnership efforts, creating scalability issues. Moreover, any API changes require updates to HRIS integrations, adding complexity and fragility to this approach.

Unified APIs

In recent years, new solutions like unified APIs have been developed to meet the demand for scalable API integrations. Unified APIs consolidate APIs of applications within a specific software category. This enables developers to connect with multiple platforms simultaneously. Also, these APIs standardize data from different applications into a common format, making it more accessible to developers.

For instance, Finch’s unified employment API simplifies integration with 200+ HRIS and payroll providers through one integration. Managing a single integration with Finch may prove to be the quickest and most cost-effective method for scaling HRIS integrations.

Native integrations

Some HRIS tools form partnerships with vendors to offer native integrations. However, these integrations are often limited in number, and the level of customer service may not be satisfactory. Additionally, accessing these integrations may involve extra fees.

iPaaS solutions

Integration platform as a service (iPaaS) solutions help companies integrate HRIS platforms into their applications, streamline workflows, and facilitate data synchronization. iPaaS is a fairly low-code solution suitable for organizations with limited tech resources. But the process can be slow and challenging to scale. Plus, they are often tailored for specific use cases. If your needs do not perfectly match, this approach can be very limiting. 

Point-to-point integrations

Point-to-point HRIS integrations, while cost-effective, are the least efficient option. They involve connecting an employer's HRIS with operational tools without using APIs or third-party solutions. These integrations are challenging to maintain and scale. Any change in one system requires adjustments to multiple connections. However, if the integration needs are minimal and a high level of personalization is essential, point-to-point integrations may be a viable solution.

Challenges to HRIS Integrations

Ensuring data quality and standardization

Challenges in HRIS integrations involve maintaining data quality, accuracy, completeness, timeliness, and consistency across multiple HR providers. These are crucial to avoid compliance and security issues. To address this challenge, establishing data standards is essential, ensuring compatibility among data from different sources. 

Note: If you are building integrations with multiple HR systems, consider using a specific tool to normalize data into a common format to save significant engineering resources.

Gated APIs and partnership complexity

Many HR platforms lack public APIs, requiring a partnership agreement to access API keys, documentation, and sandboxes. These agreements often involve security checks, lengthy negotiations, and additional fees. Some providers even demand a minimum customer count before partnering, posing a challenge for resource-limited startups seeking essential integrations for their products.

Post-integration maintenance

Ongoing maintenance is vital for the accuracy and quality of integrated data, especially for customer-facing integrations. Key maintenance issues include:

• API versioning: Custom API integrations must address versioning challenges to ensure continued compatibility with HRIS APIs, even after updates.  
• Documentation updates: Some HR API providers may not regularly update developer documentation. They may also not provide it in your language. This places additional burden on the development team.
• Monitoring and logging: To offer a smooth customer experience, you need to establish mechanisms to track the health and performance of each integration. You should also allocate engineering resources to regularly check logs and promptly address errors. 

Cost of building and maintaining 1:1 integrations

Creating and maintaining 1:1 integrations demands a substantial investment of time and resources. The entire process, from planning and testing to development and ongoing updates—can consume hundreds of developer hours and tens of, if not hundreds of thousands of dollars annually for just one integration. Unfortunately, this approach lacks scalability, as resources dedicated to integration maintenance could be better utilized to enhance product features.

Refer to our whitepaper Build vs. Buy for a detailed discussion on the merits of building integrations in-house versus using a commercially available unified API.

Scalability

When handling in-house HR integrations, scalability becomes a significant hurdle. Developers must delve into various providers' API/developer documentation, decode data intricacies, craft custom codes for each integration, test them, and offer indefinite support. Managing more than three integrations can become a monumental task. Leveraging an integration tool or API aggregator improves scalability, allowing you to concentrate primarily on product development projects 

Also read: How equity management tool Carta scaled their integration strategy overnight with Finch.   

Benefits of HRIS Integrations

HRIS integrations offer numerous advantages, reducing time, cost, and resource requirements for app developers while notably enhancing employer experience.

Benefits for HR applications/ service providers

• Increased total addressable market (TAM): The number of integrations is pivotal in SaaS tool purchasing decisions. In fact, 97% of HR admins believe that connections with employment systems, such as HRIS, are important to them. Supporting more HRIS integrations can broaden your platform's reach, enabling you to effectively serve more employers and shorten deal cycles. Utilizing unified APIs can accelerate your integration roadmap with minimal effort.
• Improved customer experience: HRIS integrations automate data synchronization between applications. This means when an employee joins the organization or achieves a milestone, they can be automatically enrolled in specific programs without manual intervention. This frictionless experience increases customer satisfaction and loyalty, encouraging more consistent app usage.
• Better compliance: Automated data synchronization between your product and the customer's HRIS ensures that any changes in either application are promptly captured and communicated. This minimizes the risk of overlooking crucial alterations in employee or organizational details, leading to better compliance.

Benefits for employers 

• Streamlined HR administration: Automating repetitive tasks and workflows reduces HR administrative burden, freeing up valuable time for strategic initiatives.
• Enhanced data accuracy: Data entry for HRIS integrations occurs only once in the HRIS and automatically syncs with other application systems. This significantly lowers the likelihood of costly data entry errors, such as delays in updating data, entering incorrect information, or forgetting to make necessary changes manually.
• HR data visibility (eliminate data silos): Integrating the HRIS with other oft-used platforms ensures a centralized system for managing all employee and employment data. This fosters greater visibility and eliminates data silos, enhancing overall organizational efficiency.
• Enhanced employee experience: HRIS integrations boost HR operational efficiency. It provides employees with a single platform to update and monitor their employment details. This eliminates the need for toggling between multiple platforms to manage benefits, performance, and payroll information.

Simplify HRIS Integrations with Finch

If you need to build multiple HRIS integrations, Finch offers a unified employment API that simplifies the process with a single integration. Finch provides a standardized data model, eliminating the need for developers to handle different data formats, development complexity, and API variations.

• Industry-leading coverage: Finch is the leader in the HR and payroll integrations space in terms of coverage and depth. It connects with over 200 HR and payroll providers—covering 88% of the US employer market—and helps you unlock easy and secure access to employment data overnight. See our integration catalog. 
• Easy, secure employer experience: The Finch Connect feature streamlines employer onboarding into two simple steps: selecting the HRIS and authorizing permissions. It takes just 30 seconds for employers to connect their HR systems with your tool. Plus, Finch improves employer experience by eliminating the need for manual data entry and reducing occurrence of errors.

Please contact us if you are looking for a comprehensive HRIS integration solution. 

If you are looking to automate payroll deductions, Finch can help. Talk to sales. 

Payroll deductions refer to the money withheld from an employee's paycheck each pay period to cover taxes, benefit premiums, and other financial obligations. Whether you're a business establishing your payroll, a SaaS tool offering employee benefits, or an employee seeking clarity on paycheck adjustments, it's crucial to grasp the different types of payroll deductions and how they differ.

This article explores common payroll deductions, their legal requirements and addresses some frequently asked questions. Plus, for those involved in employee benefits, retirement, health insurance, and more, we have a bonus section that explains how to seamlessly adjust deductions within the employer's payroll system.

Now, let’s decode different types of payroll deductions one by one. 

What are payroll deductions? 

Payroll deductions involve subtracting money from an employee's total wages each pay cycle to cover both mandatory and voluntary employment expenses, including taxes, benefits, and garnishments. 

Each deduction has distinct calculations, regulatory requirements, and is applicable in different scenarios.

The deduction amount depends on multiple factors like federal or state tax laws, withholding information supplied by the employee in their Form W4: Employee’s Withholding Certificate, and the benefits programs the employee is subscribed to. The calculation process can be manual or automated.

Some types of benefits deductions are taken out of a paycheck based on the written approval of the employee. However, statutory deductions and garnishments are withheld by the employer as mandated by law.

Types of payroll deductions

Here are the common payroll deductions to keep in mind if you are working for an employee benefits or payroll company that does business in the United States. 

Mandatory deductions 

Mandatory deductions are commonly called withholdings. Some examples of statutory payroll deductions include state and federal taxes, wage garnishments, and FICA. 

• Income taxes: Employers must withhold federal and state income taxes each pay period. Federal taxes have seven brackets (ranging from 10% to 37%), applied incrementally. Taxable income depends on the employee's filing status (single, married, head of household) and claimed allowances in Form W4.  Based on which state the employer operates in, the state income tax rate changes as well. Some states follow federal tax brackets, while others have different local tax protocols. Some states charge progressively, while some charge none. Employers must follow local payroll laws to avoid penalties. Calculating taxes is a complex process and if you are doing it manually, it can be a nightmare.

• FICA (Federal Insurance Contributions Act): FICA includes Social Security and Medicare, with a standard rate of 7.65% per paycheck (6.2% for Social Security and 1.45% for Medicare). Social Security has an income-based upper limit, and employers are mandated to match this contribution. Medicare tax, on the other hand, pays for doctor’s fees, hospital care, and nursing care for 65 years or older as well as for those who receive social security benefits. Employees earning over $200,000 annually must pay an additional Medicare tax.

• Garnishments: Employees may owe a portion of post-tax wages to cover unpaid dues in areas like child support, alimony, defaulted loans, or tax obligations. Employers can be legally ordered to withhold these amounts by courts, government agencies, or the IRS. Failure to accurately handle these payroll deductions can hold employers financially responsible.

Voluntary deductions

Employees can choose from various employer-offered benefits programs and agree to deductions from their paychecks on either a pre-tax or post-tax basis. These programs encompass 401(k) and retirement plans, health insurance, health savings accounts (HSA) and flexible spending accounts (FSA), life and disability insurance, commuter benefits, wellness programs, college savings plans, and other common voluntary payroll deductions. 

Note: Employers need written authorization from the employee for the following deductions:

• Health insurance: Employees with employer-sponsored health, dental, or vision plans have premiums deducted on a pre-tax basis from each payroll, typically with employers sharing the cost.
• 401(k) & retirement benefits: The two most common employer-sponsored retirement benefits plans are 401(k) and Roth IRA contributions. 401(k) is deducted from payroll on a pre-tax basis but subject to FICA taxes. While Roth IRA contributions are deducted on a post-tax basis. As the complexity of the retirement benefits industry increases, more employers and plan providers are relying on 401(k) payroll integrations. This helps them automate payroll deductions, save time, and significantly reduce compliance risks. 
• HSA and FSA contributions: Health Savings Accounts HSA) and Flexible Spending Accounts (FSA) are both employee health benefits that are typically deducted from payroll on a pre-tax basis. Employees can opt to deduct a certain amount of their paychecks each payroll towards paying HSA to cover specific medical expenses like copay, prescriptions, dental or eye care. HSAs are called “triple advantaged” benefit plans, because 1) the money that employees contribute is tax-exempt, 2) the money isn’t taxed while it’s in the Health Savings Account, and 3) it is also tax-free when employees use the money for qualified medical expenses. This triple advantage makes HSAs one of the most popular payroll deduction types by employers. Unlike HSAs, FSAs cannot be transferred, and have a lower contribution limit.
• Commuter benefits: Employees can use tax-free funds from their paychecks for commuting expenses, including mass transport, ride shares, and qualified parking.
• Wellness programs: Employers may offer health promotion and disease prevention plans, like diabetes management, vaccination, weight loss plans, etc. Sometimes wellness programs include employee’s spouses as well. Wellness program-related payroll deductions can be calculated pre-tax if the employee does not have any unreimbursed medical payments related to the payment. 
• College savings plans: Employees can allocate a percentage of their paycheck to state-sponsored 529 plans (known as college savings plans or qualified tuition plans) for a beneficiary's education, which may be state tax deductible. Note: they are not federal tax deductible.
• Life and disability insurance: This includes employee contribution towards group life insurance plans and short or long term disability insurance premiums.
• Others: Voluntary payroll deductions also include U.S.Savings Bond purchases or any money owed to the company for tools, uniforms, loans, etc. 

Pre-tax and post-tax deductions

Voluntary and mandatory payroll deductions can be further classified as pre and post-tax deductions. 

Pre-tax deductions are subtracted from an employee's gross paycheck before any state or federal taxes are withheld, lowering the taxable income. Common examples include health insurance, commuter benefits, group term life insurance, health savings accounts (HSA), flexible spending accounts (FSA), and retirement benefits plans. While participation is optional, it is generally beneficial for employees. Note that there's an annual limit set by the IRS on how much can be contributed to these pre-tax plans, such as 401(k).

Conversely, post-tax payroll deductions are adjusted from an employee's paycheck after taxes have been withheld. Examples include Roth IRA retirement contributions, charitable donations, disability insurance, and garnishments. These deductions don't reduce an employee's tax burden. Employees can choose not to contribute to these plans, except for wage garnishments.

How do payroll deductions work?

Employers typically rely on benefits partners to inform them about various deduction details. These deductions are then processed through a payroll provider to determine an employee's net take-home pay. Payroll providers also ensure that necessary payments are made to the appropriate government entities on time. 

The payroll deduction process follows a standard sequence:

• Deduct pre-tax contributions (e.g., health insurance, 401(k) retirement benefits, and other eligible voluntary payroll deductions) from the gross pay.
• Calculate and withhold federal tax deductions based on the employee's W4 and IRS tax bracket requirements.
• Withhold 7.65% for FICA and an additional 0.9% for Medicare tax if the applicable threshold is met.
• Determine and deduct state tax according to state tax regulations to arrive at the net pay.
• From the net pay, withhold garnishments, dues, and post-tax contributions for other employee benefits such as Roth IRA and disability insurance.

As you can see, to successfully manage payroll deductions, there’s a lot of information exchange required between the employer, payroll provider, and benefits plan partners. Manual processes can render this experience even more redundant and error-prone. Tools like Finch help automate payroll deductions to ensure a seamless experience end-to-end. Learn more.

FAQs about common payroll deductions

What are some examples of wrongful payroll deductions?

With so many deduction types, mistakes can happen. Common errors include:

• Inaccurate deduction amount: Employees often make choices about voluntary benefits plans, like how much to defer from their paycheck or which plan to enroll in. Any error in documenting these details can lead to incorrect premium deductions.
• Incorrect tax calculations: Misclassifying deductions as pre-tax or post-tax can result in employees being assigned the wrong tax brackets. Errors in adjusting these deductions can lead to overpayment or underpayment of taxes. Also, if an employee's filing status (single, joint) or employment details change but are not updated in the systems, it can cause inappropriate tax liability for the employee.
• Getting employee details wrong: Whenever an employee experiences a qualifying life change like the birth of a child, getting married or divorced—employees get the option to update their benefits deduction details mid-year. With multiple benefits providers involved, employers might miss these updates, leading to inaccurate payroll calculations.
• Other common payroll mistakes include non-compliance with local payroll laws, miscalculations of pay or overtime wages, and filing delays. 

Automating payroll deductions is highly beneficial as it captures changes and updates employee information, employment status, and contribution details promptly between systems, reducing errors in deduction calculations. Learn how Finch's automated deductions can reduce deduction errors altogether.

What happens when payroll deductions are calculated incorrectly?

If payroll is calculated with incorrect deduction details it can result in employees being enrolled into the wrong tax brackets. This can result in higher taxes, penalties, or lost interest for employees. 

If withholding calculations are not compliant with state and federal laws, employers need to compensate for back payments, not the employees. 

What is the difference between core benefits and fringe benefits?

Core benefits are the primary benefits employees receive for being employed by an organization. This includes retirement benefits, health insurance, etc. Fringe benefits are the extra perks that some employees get like free meals, childcare (up to $5,000), gym memberships, mental health benefits, group term life insurance, employee discounts, etc. 

While most core benefits are mandated by federal and tax laws, employers offer fringe benefits to retain talent and infuse a positive work culture. The fringe benefits that are translated into cash form are usually deducted from employee wages. 

How do you simplify payroll deductions for employers?

Finch is committed to making payroll deductions easy and automated for employers. It aims to do this by helping innovative SaaS tools in the retirement, benefits, and insurance sectors build solutions that can be integrated with 200+ HR and payroll systems using a single unified employment API. By allowing benefits providers to fetch data from the employer’s source of truth, Finch ensures data accuracy and timely contribution updates to payroll. 

Streamline deductions management: Finch eliminates the need for flat files, SFTP, or manual data entry to fetch employee census data and contribution details. It automates the entire process of payroll deductions by connecting the employer’s payroll systems with the benefit providers' tool. 

Enhance accuracy through automation: Today, every employer is looking for automated deductions management. It frees up employer admin time as they don’t have to manually enter data into the provider’s system each time employment status changes. 

Similarly, all contribution details can be written back into the payroll system without manual intervention. Automated adjustments increase data accuracy and help employers avoid the common payroll deduction mistakes we discussed earlier.

If you are a SaaS tool looking to automate payroll deductions, reach out to us, we’d be happy to help.

If you’ve ever worked in the retirement benefits space, you know that keeping track of information between systems is one of the most challenging aspects of managing 401(k) plans. Using manual methods makes it even more difficult. For this reason, the popularity of automated 401(k) payroll integrations is on the rise. 

In this article, we will cover how 401(k) payroll integrations work, the differences between 180 and 360-degree payroll integrations, the cost and risks of sharing data manually, and some frequently asked questions. 

We will also discuss how Finch is powering payroll integrations for top players in the retirement benefits industry such as Human Interest, Betterment, Ubiquity, and more—helping them offer best-in-class 401(k) experiences for employers and individuals.

How payroll integrations work in 401(k)

A 401(k) plan is a defined contribution plan. Employees receive a certain amount at retirement based on their contributions over the years. They defer a part of their wages into a 401(k) account which is processed and managed by plan administrators and recordkeepers. 

Employers, or plan sponsors, are in charge of running and overseeing the retirement plan. They:

• Enroll employees into 401(k) plans based on their eligibility
• Calculate contribution details 
• Record deduction details for each pay cycle

While employers can offload some of the responsibilities to a recordkeeper, there is often still a surprising amount of manual work involved. Typically, employers manually enter the data and make necessary adjustments in their payroll system or to their recordkeeper’s system.

Some plans allow employees (or participants) to submit modification requests for their deferral options too. This leads to more administrative burden and complexity for employers and recordkeepers. 

In the absence of 401(k) payroll integrations, plan sponsors are responsible for ensuring employee deductions and employer contributions are always up-to-date between systems. 

But when the employer’s payroll is fully integrated with the plan administrator's system, any changes made to employment status or contribution rates are automatically adjusted.

Who benefits from 401(k) payroll integrations?

401(k) payroll integrations are critical to all stakeholders involved in enabling retirement benefits to employees. This includes plan sponsors, payroll providers, 401(k)/retirement plan administrators, and recordkeepers. 

Plan Sponsors

401(k) plan sponsors benefit greatly from payroll integrations. They automate employee enrollment as well as contribution and match updates. This boosts operational efficiency, reduces data entry errors, and eliminates the need for manual data reconciliation by sponsors.

Payroll Providers

According to a recent survey we ran, today’s employers on average use 6-7 employment systems. As a result, they are always on the lookout for integrated experiences. As retirement benefits gain popularity among employers, especially small and medium businesses (SMB), the demand for payroll providers that easily integrate with chosen 401(k) plan administrators will also rise. This makes integrations essential in the payroll tool decision-making process.

401(k)/Retirement Benefits Plan Administrator

Retirement plan administrators can improve data accuracy and process efficiency with payroll integrations. They can also use it to offer customizable and tailored 401(k) solutions. This helps them build trust and loyalty with employers in the competitive retirement benefits market.

Recordkeepers and Third Party Administrators (TPA)

Recordkeepers and TPAs can harness bi-directional data synchronization—that is, the ability to pull employment information from payroll systems and push contribution data back —enabled by payroll integrations, to reduce data reconciliation efforts and demonstrate higher responsiveness throughout the retirement plan cycle. 

180° vs 360° payroll integrations in 401(k)

Payroll integrations are automated connections between employers’ payroll systems and 401(k) plan administrators. There are two types of connections available based on the scope of data flow: 180 payroll integrations and 360 payroll integrations. 

180 degree payroll integration

In a 180 degree payroll integration, data flow is unidirectional—from payroll providers to the 401(k) systems. This means whenever employment data (such as termination, address, promotion, etc.) is changed in payroll systems,  a 180 degree integration will automatically update the information in the 401(k) software or the recordkeeper’s system. 

However, if an employee modifies their contribution details in the 401(k) tool, it will not be reflected in the payroll system. The employer will have to update the changes on the payroll platform manually. This leaves room for data entry errors.

While it is more advanced than manual data entry, bulk uploads, or SFTP, 180 degree integrations are still limiting in scope. 

360 degree payroll integration

With 360 degree payroll integrations 401(k) plan providers can bi-directionally sync data with the employer’s payroll system:

• Any data updated in the payroll system is captured in the 401(k) tool 
• Any contribution changes made in the recordkeeper’s system are automatically adjusted in the payroll tool 

This ensures consistent and up-to-date information exchange between all systems of record. Recordkeepers can automate the entire benefits workflow—from enrollment to deductions changes.

For this reason, 360 degree payroll integration is often a favorite by sponsors. 

Benefits of 180 and 360 degree payroll integrations 

A complete integration between payroll and 401(k) systems is critical. It solves multiple problems for the retirement benefits ecosystem. Payroll integrations can:

Reduce administrative burden and save time for plan sponsors

Extracting and uploading data manually from one system to another every pay period is inefficient and resource-heavy. Employers can save significant time by using advanced integration technology to automatically track and capture retirement data changes.

Improve data accuracy to maintain compliance

401(k) is a heavily regulated industry and the compliance requirements for retirement plan providers are quite strict. 

The manual data entry process is prone to data entry errors causing compliance risks. They can also cause delays in updating deferral details leading to late deposits, wrong investments, penalties, and increased tax liability for employees. 

401(k) payroll integrations, automate and eliminate compliance risks by directly capturing data from the employers’ source of truth. 

Improve 401(k) yearly audit with streamlined employee census

Eligibility to 401(k) plans depends on the employment details captured in the employee census report. Employee census data include:

• Individual employee information (name, address, SSN, date of birth)
• Employment details (date of joining, compensation, eligibility information, employment status)
• 401(k) information (employee deferral and contribution amount)

As employee information changes throughout the year, so does their census data. 

Typically, organizations conduct yearly census updates and send employment data to their recordkeeper. Each time a new employee joins or leaves the organization, plan sponsors must send their eligibility or distribution details to their recordkeepers. It helps to keep the 401(k) plans up-to-date. 

But, doing so involves a lot of back-and-forth data exchange between employers, plan administrators, and recordkeepers. These manual processes can make it more difficult to manage.

180 or 360 degree payroll integrations sync employee census with recordkeepers and ensure that the retirement plan is always compliant and correct. 

Enhance user experience

If you are a 401(k) plan administrator, your ability to attract and retain customers depends on two things: 

• How much administrative burden you can reduce for them 
• How easily they can navigate between different systems they already use

360 payroll integrations enable you to do both. 

FAQs about 401(k) payroll integrations

1. What is the best payroll integration method?

Most 401(k) administrators prefer a 360 payroll integration. It enables them to fetch data from the payroll systems and update contribution changes back into the payroll system without having to lift a finger. Plus, it saves their customers, the employers, the headache of ensuring no data is missed.

But, a 180 payroll integration is better than no integration. Plus, only some payroll systems support 360 integrations. 

Regardless of the use case, manual data entry is the least preferred method for most sponsors and providers due to its inefficient and outdated mechanisms. 

2. How much do payroll integrations cost?

To scale your business as a 401(k) plan administrator or a recordkeeper, you need to provide some level of payroll integration. 

But, building integrations in-house is a costly affair. It requires technical expertise, and hundreds of building, testing, deployment, and maintenance hours. As of 2023, building just one payroll integration can cost SaaS businesses in the retirement industry an average of $187,500. 

Now, multiply that by 5,700+ payroll providers in the U.S. market today, and you’ll see how unrealistic this method is. 

If you have limited engineering bandwidth, look for a unified solution that will make payroll integrations easy and cost effective. 

3. What is the best way to implement a 360 payroll integration strategy? 

If you are an employer, look for a 401(k) plan partner offering bi-directional data sync capabilities (i.e., a 360 degree integration) with your payroll provider.

If you are a retirement solution company i.e. a 401(k) plan provider, recordkeeper, or TPA, create a shortlist of payroll providers that your customers use most. Then explore what a direct integration might look like for each — or contact Finch. 

Finch is a unified employment API that makes payroll integrations quick and easy for retirement benefits solutions. It allows applications to read accurate employment data and write back deduction details back into the payroll system. 

No manual data entry, bulk upload, or SFTP setup is needed. Learn more about Finch’s automated deductions here

How is Finch different from other payroll integration solutions in the market?

• Immediate integration capabilities: Finch is the only payroll integration solution today that offers integrations with 200+ HR and payroll providers in the US. By connecting once with Finch, you can immediately unlock access to hundreds of HR and payroll tools.
• Smooth employer onboarding with Finch Connect: Employers can connect their payroll to your system in two easy steps during onboarding. 1) They select their payroll providers from the options provided, and 2) they sync their account and set up permissions for data transfer using Finch Connect. Thus, completing the onboarding process in 30 seconds. 
• Manage integrations on autopilot: Finch is designed for ‘set up and forget’. It does all the heavy lifting for building and managing integrations. It enables smooth, consistent, and fresh employment data exchange between systems. 

Building a 401(k)/ retirement benefits solution? Let us help you

Finch is powering retirement benefits platforms and 401(k) plan providers like Human Interest, Ubiquity, and Betterment offer employers 360 degree integrations with the payroll provider of their choice. Want to learn more? Set up a call with our sales team here or get started with Finch today for free.