The U.S. Treasury and IRS are transitioning away from paper refund checks to electronic payments as of September 30, 2025. Since recordkeepers are at the center of managing 401(k) retirement plan participant data and transaction information, this change requires thoughtful adjustments.
Recordkeepers must reassess their processes, upgrade their technology, and ensure a seamless experience for plan participants and sponsors. This guide examines the impact of the phase-out on recordkeepers, the operational and technological changes required, and how these can be implemented effectively.
Impact of IRS paper check phase-out on 401(k) recordkeepers
Paper checks have long been a fallback method for 401(k) disbursements and participant payments. The elimination of paper checks makes direct deposit or other digital payment methods the only option for federal payouts, including 401(k) distributions and rollovers.
This creates an immediate need for recordkeepers to:
- Digitize distribution workflows: Replace paper forms and manual approvals with electronic requests, e-signatures, and API-driven triggers so payments flow without human rekeying. This reduces error rates and shortens time-to-pay.
- Verify participant banking details: Recordkeepers must collect, update, and securely store direct deposit information for every account holder. Implement multi-step verification and ACH tokenization to encrypt account data at rest.
- Support unbanked participants: Provide prepaid cards, custodial wallets, or payment-card rails as backup options, along with clear enrollment guidance and support for participants without bank accounts.
- Strengthen fraud and exception handling: Add real-time anomaly detection, dual-factor approvals for large disbursements, and automated return handling. Build fast reconciliation loops with custodians and banks to close exceptions within SLA windows.
- Regulatory and audit readiness: Update audit trails, data-retention policies, and reporting templates for DOL/IRS review. Electronic workflows must surface time-stamped approvals, identity verification steps, and payment receipts.
- Participant communications and change management: Proactively notify participants of changes to capture missing banking details before enforcement deadlines. Share steps on how to provide direct deposit information and mention the timelines.
Beyond compliance, the phase-out is an opportunity to cut costs, reduce fraud, and improve participant satisfaction. Recordkeepers who move quickly will reduce operational friction and manual errors.
Technology and workflow changes recordkeepers must prepare for
Transitioning to electronic 401(k) payments is not just about replacing checks with ACH. It requires a broader modernization of systems and processes:
Core system upgrades: Prepare your platforms
Recordkeepers should implement robust platforms that can handle end-to-end electronic payments and provide participants with self-service. Modern recordkeeping systems must:
- Integrate with payroll and banking networks for real-time payments.
- Automate payment triggers based on plan distributions, rollovers, and refunds.
- Adopt an API-first core that orchestrates the full distribution lifecycle to eliminate manual handoffs and create auditable, timestamped workflows.
- Implement tokenization for account data and integrate with payment gateways and custodial bank APIs for secure data storage.
Data management and compliance: Enterprise-grade protection for information
New regulatory standards demand:
- Secure collection, validation, and management of banking information, including regular audits.
- Automated fraud prevention strategies leveraging AI and machine learning.
- Transparent reporting, with audit-ready tracking of every transaction.
- Use instant account verification (IAV), micro-deposits fallback, and multi-factor identity verification to reduce failed payments and returns.
Operational workflow adjustments: Minimize friction and operational risk
Recordkeepers need to:
- Update standard operating procedures to eliminate all paper-based payment steps.
- Train operations, call center, and sponsor-facing teams on digital verification, exception playbooks, and how to onboard unbanked participants.
- Establish contingency protocols for payment exceptions or system failures.
Compliance, reporting, and vendor governance: Close the audit loop
- Ensure every electronic payout has an immutable audit trail by maintaining the eligibility record, consent, verification artifact, approval, payment rail used, transaction ID, and reconciliation result.
- Update data retention policies to meet DOL/IRS review standards.
- Tighten vendor contracts around SOC2/PCI requirements, and require evidence of API SLAs and test windows.
Make electronic 401(k) recordkeeping effortless with Congruent Solutions
The shift to electronic 401(k) payments is both urgent and complex. Recordkeepers need proven technology and trusted operational support to navigate the transformation.
Congruent Solutions is a trusted partner offering advanced technology and business process outsourcing for recordkeepers. From complex distribution processing to loan management and employee account transfers, we support recordkeepers with end-to-end operational support.
Our CORE platform automates electronic payments, ensures regulatory compliance, and integrates seamlessly with payroll and participant banking systems. It offers robust payment automation, API integrations, and compliance-ready workflows.
From participant communications to transaction processing, Congruent’s solutions and services ensure accuracy, speed, and scalability. We address the most pressing challenges using our industry expertise, enabling recordkeepers to achieve faster payouts, stronger fraud controls, and regulator-ready documentation.
Connect with Congruent Solutions for the technology, processes, and expertise you need for secure, scalable, and auditable recordkeeping.
