30 Jul Direct Deposit

Everyone looks forward to receiving their direct deposit on pay day. If there is an issue with the deposit, the payroll department becomes the employees’ best friend. Well, do you really know what goes into making those direct deposits happen each pay day? Let’s explore the process….

Overview

Direct deposit also known as electronic funds transfer (EFT) is a convenient way to pay employees. Some advantages for employees are readily available funds on pay day and they don’t have to make a trip to a financial institution to cash a paper check. For employers, some advantages are not having to deal with the cost of issuing paper checks and not having to reissue lost or stale dated checks. On the flip side, some disadvantages are employees not having a bank account and employers having a shorter window to reverse a payment.

The Consumer Financial Protection Bureau’s Regulation E, NACHA’s Operating Rules, and state laws regulates the direct deposit process. The employer needs an account number, a bank routing number, and the type of account (checking or savings) to set up direct deposit. Usually, the information is provided to the employer via a direct deposit form or the employee can enter the information via a self service portal.

Process

Once the information is provided and processed, it starts the direct deposit cycle. The first pay day after the direct deposit is set up, some employers will send a prenotification or test run with a zero dollar amount to the employees’ financial institutions. The prenotification will confirm if the information provided by the employee is correct prior to a live deposit being sent.

During payroll processing, the employer creates an ACH file to send to the Originating Financial Institution (for the employer), the payments are settled, then an ACH file is sent to the Receiving Financial Institutions (for the employees). If a mistake is made with a deposit, the employer doesn’t need authorization from an employee to correct it. The employer has five banking days to process a single item reversal and it has to be for the same payment amount originally deposited.

If a direct deposit isn’t received, the employee should follow up with the ACH department for their financial institution and the payroll department for their employer. Direct deposits are required to be available on the day they are settled and the date is determined by the employer.

Now, you have some insight on what it takes to produce direct deposits!