Breaking Time Barriers: By Laura Lough, Esq.
Payroll and Same-Day ACH
There's a lot of buzz around same-day ACH and its implementation, but what does it really mean for APA members? First, the basics. The Automated Clearing House (ACH) is the communication system that connects banks and credit unions in the United States -- electronically, of course. Through 23 billion electronic financial transactions, the system moves more than $40 trillion annually. In payroll terms, when an employee receives wages through direct deposit, the method of showing that the money came from the employer's financial institution and is now in the employee's bank account is an example of an ACH transaction.
APA's friend, NACHA –The Electronic Payments Association®, is the manager of the ACH Network and recently adopted a new rule, the Same-Day ACH. The Federal Reserve Board approved the new rule for the Federal Reserve Bank as an amendment to existing FedACH same-day services in 2015.
Existing ACH Rules
Up until now, the ACH rules meant a two- to four-business-day wait time to complete transactions. This occurred because banks had only one window in which to submit their ACH file (i.e., a collection of credit card payments, direct deposits, individual bill payments, etc.). If an ACH transfer occurred after the window closed for the day, processing could not occur until the next day's window opened. In addition, the ACH is based on sufficient funds and accurate data. Therefore, to avoid the risk of releasing money incorrectly, financial institutions were allowed to hold newly arrived funds for two business days.
New Same-Day ACH
In a world of instant messaging and mobile phone banking, ACH transaction time can seem like snail mail. The new rule allows processing of transactions within one business day, i.e., same type of transaction, only faster. Implementation of the rule is phased-in:
- Phase 1: September 2016 -- the ability to receive and process same-day payouts (credits) becomes mandatory through two Eastern Time windows with a 10:30 a.m. file transmission and 1:00 p.m. settlement time and a 2:45 p.m. file transmission and 5:00 p.m. settlement time. Funds must be available to the receiver by the end of the day in which the file was submitted.
- Phase 2: September 2017 – the ability to collect payments (debits) becomes mandatory in the same two windows as payouts. Funds must be available to the receiver by the end of the day in which the file was submitted.
- Phase 3: March 2018 – financial institutions must make same-day ACH funds filed on time available to receivers by 5:00 p.m. local time. This is in any U.S. time zone.
Financial institutions may implement phases 2 and 3 before the mandatory deadline. According to NACHA, some banks already have plans to provide funds to receivers by 5:00 p.m. on the day of filing.
But wait, here's the hitch: while all financial institutions must be able to receive same-day payments from other banks and credit unions, offering services to customers to send same-day ACH payments is voluntary. So, if your employer's bank does not offer same-day ACH, you're out of luck on quick payroll payouts. In addition, international payments and transactions of more than $25,000 cannot be made through same-day ACH. The $25,000 limit is for a single transaction, not a batch. While the federal government is not yet participating, the Electronic Federal Tax Payment System (EFTPS) remains in place for same-day tax payments by wire transfer through the Electronic Tax Application as long as the wire is received by 5:00 p.m. Eastern Time.Payroll and Same-Day ACH
For payroll professionals, same-day ACH has some advantages. These include:
- Reducing time between reporting hours worked and making wage payments for hourly and temporary workers.
- Offering the option to pay terminated employees by direct deposit on the day of termination, which may assist in compliance with state wage payment deadline requirements.
- Providing flexibility for missed deadlines, late and emergency payrolls, and enabling employees to have faster access to their wages in these situations. For example, if wages are paid on a Friday and the processing deadline is missed because of weather conditions, same-day ACH will allow a transaction on Friday with employees still paid on time.
- For processing mistakes caused by incomplete payroll processing or some other reason, same-day ACH would allow for a correction without delaying wage payments.
- For cash-flow strained businesses, employers could wait for a customer to pay them before processing payroll – all on the same day. This not only extends flexibility in time, but offers more certainty in receiving and making payments.
Same-day ACH also has some disadvantages, including an increase in transaction costs, changes to file requirements, new file submission cutoff times, and necessary employee education on when direct deposits will show in their bank accounts.
APA supported the Same-Day ACH rule through its Electronic Payments Committee (EPC) and relationship with NACHA, as well as letters sent to the Federal Reserve Board. Members interested in participating in the EPC may contact APA's Senior Manager of Payroll Information Resources, Curtis Tatum, Esq., at [email protected]Alice P. Jacobsohn, Esq., is Senior Manager of Government Relations for the APA.