When your business outsources payroll, it can feel like a great way to save time, eliminate administrative friction and benefit compliance (thus reducing the risk of error). But in reality, it usually means that when your payroll provider does TPA work, you don’t see the issues until it’s too late.
When you have one provider running your payroll AND administration, that means you have a single system – and one way to interpret it. It can be efficient but a payroll provider doing TPA work means if something is coded incorrectly or there are errors in the payroll fields there is likely no way of catching the issue like there is with independent TPA.
The lack of independent oversight and conflicts of interest can be an issue.
Plan sponsors might be assuming that the bundled system of TPA work and a payroll provider is going to be fine but that is rarely the case. There can be issues with non-standard compensation, eligibility and other formulas that don’t fit neatly in a box. And if that design doesn’t fit in the system, it will process it incorrectly – probably every time.
And under ERISA, the plan sponsor is always responsible. If there is a mistake, the plan sponsor has to pay corrective contributions and explain the issue to participants. The liability is all on the plan sponsor.
Generally speaking, by the time you realize there is an issue, it is already going to cost your organization a hefty amount. This can also take time to unravel the bad data to find a mistake.
It’s critical to make sure the plan design works properly BEFORE it ever is unleashed because if your payroll provider and TPA are the same company, there isn’t anyone else making sure everything runs the way it should – catching errors before they snowball.
Independent oversight is necessary – and critical. There should be an independent agency reviewing the process, fees, data and results.
You should avoid using the same company for payroll and TPA services because in most cases, convenience doesn’t replace accountability.
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