Same-Day Direct Bank Deposits to Speed Up Employee Payments

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By Howard Perlman

A procedural upgrade Sept. 23 to the Automated Clearing House (ACH) nationwide system for electronically transferring amounts between bank accounts is to allow employers' electronic payments to employees to be completed the same day they were initiated.

The improved electronic transaction speed implemented through the same-day ACH initiative is to help employers pay employees not just quicker, but in a more convenient manner for compliance with wage-payment requirements, especially those regarding same-day termination pay. Nine states have requirements to pay discharged employees immediately upon termination, with limited exceptions: California, Colorado, Hawaii, Illinois, Massachusetts, Minnesota, Missouri, Montana and Nevada.

The standard ACH transaction settlement speeds now in effect do not always allow employers to fulfill electronically same-day payment requirements. ACH-credit transactions, those in which senders initiate a transfer from their account to a receiver's account, settle in one or two business days, while ACH-debit transactions, those in which receivers initiate a transfer from a sender's account to their account, settle the next business day, the National Automated Clearing House Association (NACHA) said on its website.

All banks and credit unions in the U.S. generally are required starting Sept. 23 to be able to receive same-day ACH transactions, but banks and credit unions may choose whether they will allow their customers to initiate same-day ACH transactions, NACHA told Bloomberg BNA in an e-mail Aug. 17.

“This mandate to receive same-day ACH payments gives those making the payments the certainty of being able to send same-day ACH payments to any account throughout the U.S.,” NACHA said in the e-mail.

Employers seeking to initiate a same-day ACH transaction would insert into the effective-entry date field of an electronic ACH file the date when the transaction is to be initiated, NACHA said. The option to send payments at the current standard ACH transaction settlement speeds is to still be available, and employers would select this option by inserting into the effective-entry date field a date after the date the transaction is to be initiated.

The maximum amount that may be included in a single same-day ACH payment, or in the case of a batch transmission in a single payment within the batch, is $25,000. For processing a direct-deposit batch payroll file that would transfer funds into employees' bank accounts, this maximum applies to each direct deposit to an account, but not to the batch payroll file as a whole, NACHA said in guidance for employers and payroll professionals.

Implications for Tax Compliance

A notable exception to the general applicability of same-day ACH receipt is that the federal government is to not process same-day ACH transactions as of Sept. 23, although the federal government might accept the transactions in the future, the Federal Reserve said online in answers to frequently asked questions regarding same-day ACH processing.

“Any forward entry originated from, or received by, the federal government will not be eligible for same day settlement and will continue to settle on a future date regardless of submission date and time,” the Federal Reserve said.

Same-day ACH therefore is to not be available for fulfilling tax-deposit requirements with the federal government, especially the requirement that when an employer accumulates at least $100,000 in tax liability, the employer must deposit the taxes by the next banking day.

However, states generally are to accept same-day ACH transactions for fulfilling their requirements to deposit withheld taxes, the Federal Reserve said. Some local jurisdictions also are to accept same-day ACH transactions for paying withheld local income taxes or other taxes, NACHA said Aug. 9 in a flyer.

Payments of tax to foreign governments in compliance with payroll requirements for employees working abroad are to not be eligible for same-day ACH processing, the Federal Reserve said. This restriction is part of the general ineligibility of using same-day ACH to send funds abroad, NACHA said.

Among the types of payments other than withheld state and local taxes that payroll departments could more quickly perform using same-day ACH for domestic recipients are off-cycle or emergency payrolls, expense reimbursements, amounts deducted for creditor garnishments and payments made as part of correcting errors, NACHA said.

Processing Times

There are to be two daily time frames, also referred to by NACHA as windows, for processing same-day ACH transactions. Each window has deadlines for initiating a same-day ACH transaction and settling the transaction.

For the first window, regardless of time zone, funds that are to be transferred from a payer's account must be in the account by 10:30 a.m. Eastern time and the transaction initiated by then, with a settlement deadline of 1 p.m. Eastern time for same-day ACH transactions timely initiated, NACHA said Aug. 9 in a same-day ACH business guide. These deadlines, regardless of time zone, for the second window respectively shift to 2:45 p.m. Eastern time and 5 p.m. Eastern time, NACHA said.

Financial institutions that participate in same-day ACH transactions can set earlier deadlines than those required by NACHA's same-day ACH processing windows, so employers should inquire with the institutions that are to send and receive their funds as to applicable deadlines.

Implementation Phases

The upgrade Sept. 23 is to be the first of three same-day ACH implementation phases and requires financial institutions to receive same-day ACH-credit transactions, but not same-day ACH-debit transactions, NACHA said in a checklist for processors. For this phase, funds transferred with same-day ACH must be available by the end of the processing day of the financial institution that received the funds.

The second phase of implementing same-day ACH, which is to take effect Sept. 15, 2017, is to require financial institutions to receive same-day ACH-credit and ACH-debit transactions, with the same funds availability deadline as in the first phase.

In phase three, which is to start March 16, 2018, ACH-credit and ACH-debit transactions again are to be available for same-day settlement but financial institutions that receive funds this way must make them available by 5 p.m. local time.

Many financial institutions as of the start of the first implementation phase Sept. 23 are to provide funds availability by 5 p.m. local time, forgoing the less stringent funds-availability standard allowed under the first two phases. Among 41 of the 48 financial institutions that receive the highest volumes of ACH transactions in the U.S., 71 percent are to adopt the phase-three standard for funds availability by the start of the first phase, NACHA said Aug. 9 in a release of survey results.

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