Adapting to IRS Mandates: Technology and Cybersecurity Solutions for 401(k) Recordkeepers

The Internal Revenue Service (IRS) will discontinue issuing and accepting paper checks for federal tax refunds, payments, Social Security benefits, and vendor payments, effective September 30, 2025, This move supports a federal effort to modernize financial transactions, improve efficiency, reduce costs, and combat fraud, as paper checks are 16 times more susceptible to fraud than electronic methods.

The IRS mandate for electronic payments significantly impacts 401(k) recordkeepers, shifting from paper checks to ACH transfers and other digital methods. Recordkeepers must update their systems to manage this transition efficiently, ensuring compliance with IRS and ERISA regulations. This change also affects TPAs and retirement plan administrators relying on recordkeepers for accurate and compliant processing.

The shift to electronic payments underscores the need for modernized technology and robust cybersecurity to safeguard sensitive participant data against cyber threats. Recordkeepers must ensure secure and seamless integration with digital platforms while adhering to IRS regulations.

This guide will assess the impact of electronic payments on 401(k) recordkeeping and offer recommendations for recordkeepers to effectively adapt their systems.

Quick facts:

IRS paper check phase-out begins September 30, 2025
Hardship withdrawals, loans, and rollover distributions must transition from paper checks to electronic systems
401(k) recordkeepers face immediate competitive and operational pressures to modernize recordkeeping systems
Requirements for 401(k) recordkeepers: Enhance cybersecurity, digital payment compatibility, and participant portal upgrades
Chat with experts at Congruent Solutions to stay ahead and ready for IRS updates with seamless 401(k) modernization.

Why technology and cybersecurity are important for 401(k) recordkeepers

As the retirement industry shifts to electronic-only payments, 401(k) recordkeepers must prioritize modern technology and strong cybersecurity. With rising volumes of sensitive data, the risks of data breaches, fraud, and non-compliance with IRS and ERISA rules are higher.

Upgrading legacy recordkeeping systems and manual processes helps in the following ways:

Efficiency and fraud reduction: Electronic payments minimize delays, curb check fraud, and offer traceability.
Regulatory compliance: IRS and ERISA requirements demand that recordkeepers and retirement plan providers maintain secure, reliable, and auditable systems.
Cost reduction and scalability: Automating processes and using digital workflows cuts costs and errors. Scalable cloud platforms can easily handle fluctuating volumes, making them ideal for peak periods or growing user bases.
Participant expectations: 401(k) participants expect modern interfaces and electronic payment options, and recordkeepers relying on paper checks risk losing relevance and competitiveness.

Technology requirements that recordkeepers must prepare for

401(k) recordkeepers must modernize their systems to comply with the changes due to the IRS paper check phase-out. The key changes needed are:

Participant portal upgrades: Modernized participant portals are essential for collecting and securely storing banking information, such as routing and account numbers, for direct deposits. These portals should feature user-friendly interfaces and two-factor authentication to enhance security.
Payment system upgrades: Payment systems must have ACH transfer, wire transfer, and direct deposit capabilities.
Real-time transaction tracking: Systems must provide real-time updates on payment statuses to ensure transparency and compliance with IRS reporting requirements.
Distribution processing: Hardship withdrawals, loans, and rollover distributions must transition from paper checks to electronic systems.
Interoperability with payroll systems: Seamless integration with employer payroll systems is crucial for coordinating contributions and distributions.
Compliance monitoring tools: Automated tools can help recordkeepers monitor transactions for compliance with IRS and ERISA regulations, including non-discrimination tests and contribution limits.

Cybersecurity risks and how recordkeepers must prepare for them

With the shift to electronic payments, 401(k) recordkeepers must also prepare for the increase in exposure to cyber threats. Attackers target retirement platforms to access sensitive participant data, reroute funds, or disrupt operations. Given the high value of 401(k) participant data, even a single breach can result in significant financial and reputational damage for recordkeepers. Common risks include:

Phishing and social engineering: Attempts to divert payments via fake communications.
Ransomware: Block access to payment processing and recordkeeping systems to important participant data.
Account takeovers: Unauthorized changes to participant payment instructions.
Data breaches: Theft of sensitive information, including Social Security numbers and banking details.

To prepare, recordkeepers must implement layered security strategies, such as:

Encrypt sensitive participant data during transit and at rest.
Prevent unauthorized access to participant data using multi-factor authentication (MFA).
Continuous monitoring to proactively detect vulnerabilities and suspicious activities.
Conduct regular risk assessments aligned with ERISA and Department of Labor (DOL) guidelines.
Teach employees about cybersecurity basics and how to recognize social engineering threats.
Develop incident response plans with mandatory reporting and mitigation procedures for security incidents.

Best practices for modernizing 401(k) recordkeeping

To thrive in an all‑digital environment, 401(k) recordkeepers should embrace a holistic modernization strategy that combines robust cybersecurity with operational efficiency. The following best practices allow recordkeepers to modernize their systems and prepare for the end-to-end digital era of retirement planning:

Adopt a cyber‑resilient culture

Conduct quarterly phishing simulations and annual breach drills.
Offer role-based security training with tailored modules for staff, IT teams, and executives.
Create an incident-response playbook and update it after conducting drills or responding to real events.

Enforce strict access controls

Use a least-privilege model to give staff and vendors only the permissions they need.
Automate provisioning and deprovisioning processes using Identity and Access Management (IAM) solutions.
Implement MFA for all admin and vendor portals.

Automate real‑time monitoring and anomaly detection

Use SIEM tools to flag unusual logins, data exports, or payment-rule changes.
Integrate machine learning (ML) analytics to detect subtle indicators of compromise.
Set up automated alerts with clear escalation methods to your security team.

Maintain comprehensive audit trails

Log every step of the disbursement lifecycle, from initiation to authorization, execution, and reconciliation.
Store logs in write‑once, read‑many (WORM) repositories to prevent tampering.
Regularly review and archive logs in accordance with IRS and ERISA retention guidelines.

Conduct periodic vendor and technology reviews

Require annual SOC 2 (Type II) or ISO 27001 certification from all payment‑processing and software partners.
Perform vulnerability scans and penetration tests on third‑party integrations.
Ensure contracts include clear SLAs for security breaches, data handling, and notification timelines.

Implement a secure and modular architecture

Break down monolithic systems into microservices or APIs, allowing you to patch and upgrade components independently.
Utilize encryption-as-a-service platforms to centralize key management and streamline compliance.
Adopt zero‑trust networking principles to segment assets and verify every connection.

Focus on ongoing improvement

Benchmark your controls against industry frameworks.
Evaluate the effectiveness of detection and response processes with mean time to detect (MTTD) and mean time to respond (MTTR).
Gather feedback from plan sponsors and participants on portal usability and security.

How Congruent Solutions can help modernize recordkeeping and ensure cybersecurity

Congruent Solutions helps 401(k) recordkeepers, retirement plan administrators, and third-party administrators (TPAs) modernize their operations. The CORE platform simplifies recordkeeping and administration, ensuring compliance, improving data security, and supporting participant-centered services.

Here’s how Congruent Solutions helps clients transition away from legacy systems and paper-based processes to fully digital operations:

System modernization: Congruent’s cloud-native recordkeeping platform supports ACH transfers, real-time payment processing, and seamless API integrations. We help recordkeepers comply with the IRS phase-out of paper checks and new SECURE Act 2.0 requirements. Dynamic analytics and real-time dashboards enable efficient and transparent plan administration remotely.

Smooth data migration: Congruent performs a full data audit, uses automated ETL pipelines, and sandbox testing to cleanse and reconcile legacy records. We execute a phased cutover with rollback plans and provide audit-ready migration logs meeting IRS and ERISA standards, ensuring no disruption to plan operations.

Cybersecurity excellence: Backed by industry best practices and guidance from the DOL/IRS, Congruent delivers layered defense mechanisms, robust encryption, and 24/7 monitoring. We help you minimize breach risks and ensure prompt incident response.

End-to-end guidance and change management support: Congruent’s experts guide clients through process audits, policy redesign, and stakeholder training. We help ensure staff and participants are prepared for new technologies and workflows.

Participant-centric experience: Secure participant portals allow users to access information, update details, and receive messages easily. This helps reduce errors and improves engagement.

Partnering with Congruent Solutions helps recordkeepers build long-term operational resilience, deliver an exceptional participant experience, and stay ahead of ever-changing industry regulations.

Contact our experts today for end-to-end guidance on modernizing your recordkeeping systems and processes.

FAQs

Are checks being phased out by the IRS?

Starting September 30, 2025, the IRS will no longer issue or accept paper checks for tax refunds, payments, Social Security benefits, and vendor payments. All disbursements will switch to electronic methods to improve speed, lower costs, and reduce fraud.

What steps must 401(k) recordkeepers take to prepare for the electronic payments after the paper checks phase out?

Recordkeepers should audit current systems, implement digital-first technology, update participant portals for digital data collection, train staff on new procedures, and enhance cybersecurity measures to protect sensitive data.

What are the long-term benefits of modernizing 401(k) retirement plan recordkeeping systems?

Modernizing recordkeeping offers the following advantages:

Efficiency and cost savings: Automated workflows reduce manual errors and administrative overhead.
Enhanced security and compliance: Real‑time monitoring, encryption, and audit trails to meet IRS/ERISA and DOL requirements.
Scalability and resilience: Cloud-native platforms manage growing user bases and disbursement volumes without downtime.
Improved participant experience: Intuitive portals and faster payments build trust.
Data‑driven insights: Analytics enable proactive plan management and strategic decisions.