How do direct deposit pay programs work?

Many companies offer employees the option of direct pay deposit that automatically deposits paychecks into an employee's checking and/or savings account in participating banks. Most states have enacted laws or regulations and/or policies with respect to direct deposit of employee wages, however.

The advantages of participating in direct deposit are numerous. Employer advantages:

• Eliminates costly steps in the payroll process, including the need to stop payment on and reissue lost or stolen checks.

• Fewer check processing charges and reconciliation maintenance fees from the employer's financial institution.

Employee advantages:

• No visits to the bank or bank by mail in order to deposit a paycheck.

• Pay is available on payday because it is automatically deposited.

• No worries about lost or stolen checks or about receiving paychecks while on vacation.

• Pay receipts detailing the gross and net pay and the deductions made are still available.

How direct deposit works. Generally, the following steps should be followed to implement a direct deposit of pay program. Before you implement a direct deposit program, you should look at your current payroll/HR system. You need to determine whether it can support a direct deposit program.

1. Enter into an agreement with a financial institution to act as the Originating Depository Financial Institution (ODFI) for originating direct deposits via the Automated Clearing House (ACH) network.

2. Enroll employees in the direct deposit program after receiving an enrollment form that authorizes you to make direct deposit payments into one or more bank accounts on behalf of the employee.

3. Perform a test run or prenote by sending the employee's bank account information to the ODFI via the ACH network.

4. Make corrections or changes if notified of any changes after the test run.

5. Process the next payroll, preparing the ACH file and sending it through an ACH transaction to the employee's financial institution one or two days before the effective date.

6. Post the payment to the employee's account by the employee's financial institution.

7. Issue a statement of payment of wages to the employee. This statement is generally the same as the statement that would accompany a live paycheck.

Promoting direct deposit to employees. Direct deposit can be an important payroll tool for saving time and money. However, to establish a successful program, you are going to have to convince employees that direct deposit will work for them. It will be important for you to determining the best method of communicating what direct deposit is and its benefits are. Some tips for communicating the program include:

• Use a simple, easy-to-read authorization form.

• Stuff paycheck envelopes with direct deposit information and the enrollment form on a frequent basis.

• Include enrollment information with paperwork required for newly hired employees. Note that if your state does not allow mandated direct deposit, you must allow employees to request a paper check.

• Insert articles about direct deposit in company newsletters.

• Inform employees that senior management is using direct deposit.

• Use contests to encourage enrollment.

• Use posters, bulletin board announcements, and e-mail messages.

• Feature information on company web pages.