Bank Failures Impact Payroll Professionals
On Friday, March 10, 2023, Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver. On Sunday, March 12, Signature Bank was closed by the New York Department of Financial Services and the FDIC was appointed as the receiver.
On March 12, the U.S. Department of the Treasury, Federal Reserve, and FDIC announced that all deposits in both banks, regardless of the dollar amount, would be protected and depositors would have access to their money starting on March 13. In an FAQ for SVB, the FDIC explained that “all direct deposits, for example, social security, payroll, veterans' benefits, disability, unemployment or any payment you receive electronically will continue as usual.” A similar statement is included in the FAQ for Signature Bank. The delay in access to funds raised numerous payroll issues for employers.
At least two payroll processors used SVB: Rippling and Patriot Software. In a March 11 blog post, Rippling outlined the steps it was taking to process payroll, including transitioning its accounts to a different financial institution and using its capital to fund payroll runs on March 10 and 13. Similarly, in a March 12 letter to its customers, Patriot Software outlined the steps it was taking to “regain normal operations” this week.
Employees and Employers
Employees who had their payroll direct deposit account at SVB would not have received their pay on March 10. Payments made on or after March 13 should be deposited as scheduled in the FDIC financial institutions handling the former SVB and Signature Bank accounts.
Employers using SVB also would not have been able to fund their payroll deposits on March 10 (unless they also had funds in another financial institution that could be used for payroll).
While relatively rare, bank failures do occur. According to the FDIC’s Bank Failures in Brief webpage, there were no bank failures in 2022 or 2021, four each in 2020 and 2019, none in 2018 and eight in 2017. The economic crisis of 2008 led to 140 closures in 2009, 157 in 2010, and 92 in 2011. SVB, which had assets of $209 billion, is the largest financial institution to fail since the 2008 failure of Washington Mutual Bank, which had assets of $307 billion.
For employers facing issues with meeting their payroll obligations due to a bank failure, APA offers the following best practices.
- Communicate with your employees. Let your employees know what the issue is, the steps you are taking, and the expected pay date, if known.
- Fund payroll through other means, if possible. Employers facing liquidity issues may consider a bridge loan or other funding source.
- Know your payroll service provider options. Depending on the payroll service provider, there may options available to work around the banking issues.
- Consult your legal department. Pay date requirements, state payroll tax deposit deadlines, and penalties vary by state. Check with your legal department to determine potential liability. Also, employers considering furloughs, layoffs, or other adjustments to employee work schedules need to consider federal and state rules and regulations.
- Do not use withheld federal payroll taxes to fund payroll. Employers that willfully do not pay over withheld federal payroll taxes may be subject to the trust fund recovery penalty, which is equal to 100% of the tax.
- Document your efforts. Keep records of the actions you take to pay your employees and deposit payroll taxes. This information may be helpful in a request for penalty relief from federal or state agencies.
- Watch for penalty relief granted by federal and state agencies. The California Employment Development Department has announced that it is waiving penalties for employers that are unable to make payroll deposits timely due to the SVB failure.
Global Payroll Implications
The effects of the failure of SVB was not limited to the U.S. On March 13, the Bank of England announced that Silicon Valley Bank UK, the United Kingdom subsidiary of SVB, is being sold to HSBC UK Bank. Similar to SVB accounts in the U.S., the Bank of England confirmed that “all depositors’ money with SVBUK is safe and secure as a result of this transaction. All services will continue to operate as normal and customers should not notice any changes.”
To learn more about federal and state laws, regulations, and information to keep your company's payroll operations in compliance, check out Payroll Source Plus.
Curtis E. Tatum, Esq., is In-House Counsel and Director of Federal Payroll Compliance for the APA .