Home/ Direct Deposits/ Reducing or Eliminating the Risk of Direct Deposits

Reducing or Eliminating the Risk of Direct Deposits

Overview

As a payroll processor, if you act as the intermediary for direct deposits, you may be undertaking significant risk. When you draft funds from your clients for each payroll into your bank account and then disburse the funds to their employees, you always run the risk of insufficient funds (NSF).

If you receive an NSF notice 1, 2, 3, 4, or 5 days after the employees have been paid, the employees got paid out of your funds and you hope that your client will reimburse you. For the small price that most service providers charge for payroll services, that risk may be too high.

Two Methods to Reduce or Eliminate NSF Risk

There are two ways of reducing or eliminating the NSF risk for payroll processors, as configured in Employer > Employer Setup > Screen 4.

Method 1: Change Days in Advance to Draft Employer's Account

This method reduces risk by drafting the employer's bank account before paying employees.

Using an Escrow Account

If you deposit funds into one common ACH processor's bank account for all your clients, this bank account is used as an escrow account. All funds from your clients get deposited into this escrow bank account and all employees for all clients are paid from this account.

Example scenario:

  • Your escrow account has a balance of $100,000 for 5 clients
  • You receive an NSF notice for one client for $20,000
  • If you have less than 3 days before paying employees, your client's employees will be paid out of the escrow account
  • There won't be enough funds left to pay the other 4 clients' employees

Minimum 3-Day Advance Draft

The minimum number of days to draft the employer's bank account to reduce risk is 3. If you enter less than 3 days, you increase the risk.

This is due to a NACHA rule that gives banks up to 3 days to report an NSF to the transmitting bank.

If you receive an NSF and your client's employees have not been paid yet, you can ask your ACH processor to cancel the payments to those employees until your client has wired the funds into your account to cover the NSF.

Automatic Payment Date Adjustment

ProPay provides additional protection for payroll processors by automatically changing the date employees receive their direct deposits when necessary.

Example:

  • Pay date is 04/30
  • Number of days in advance to draft employer's account is set to 3
  • Your client gives you payroll hours on 04/29 instead of 04/27 (2 days late)

In this case, ProPay will automatically change the date the employees receive their direct deposits by 2 days. Employees will get paid on 05/02 instead of 04/30.

If you receive an NSF by 04/30, you can ask your ACH processor to cancel the payments to those employees until your client has wired the funds into your account to cover the NSF.

If you still wish to take the risk and pay the employees by 04/30, you may change the days in advance to draft the employer's account to 1.

Method 2: Deposit Funds into Each Employer's Bank Directly

With this method, ProPay creates a separate ACH file for each of your client's direct deposits instead of one file with all clients. Each direct deposit ACH file will need to be emailed or uploaded to each client's bank.

File Delivery Options

After the file is created by ProPay, there are 3 options to send the file to the client's bank:

  1. Email to client - The file is emailed to your client, who submits it to their bank
  2. ProPay Web download - The file is available in ProPay Web automatically after each payroll is processed. Your client may download it and submit it to their bank
  3. Direct submission - You may submit the file to your client's bank directly if you have access

Advantage

The advantage of doing it this way is that you eliminate the NSF risk entirely.

Bank Acceptance

The majority of larger banks accept these files. Here are a few examples:

The list is extensive. Call your bank to find out if they accept ACH file uploads.

Related Topics

← Back to Index