Most employers are shifting away from traditional pensions in favor of 401(k) plans because, unlike a pension, a 401(k) consists of defined contributions from a worker's annual wages. Some employers can also match a specific percentage of their employees' contributions to that fund – this process is also known as employer contributions. This kind of plan is increasingly popular among employers for many reasons, including greater tax deductions and more loyal workers.
First, the employer chooses to match a certain percentage of their employee's contributions. This percentage is usually proportional to the employee's annual salary and the amount their employer can reasonably contribute.
The most common matching plan is 50 cents for every dollar an employee contributes, at a contribution limit of 6%. To break it down, if the employee chose to contribute the full 6% of their earnings for that year, the employer would contribute 3%.
Some companies match dollar for dollar, but this means the employer match contribution limit is generally lower – typically about 3% of the employee's salary. Some employers also choose to contribute a fixed dollar amount unrelated to pay, but this is rare.
Do companies have to match 401(k) contributions? Not according to the IRS. However, it's an attractive concept for both employees and employers. Employees like employer matching because it's an easy way to save for retirement, while employers can reap benefits like improved staff morale and tax deductions. The Department of Labor outlines the minimum standards for most employer-sponsored health and retirement plans in the Employee Retirement Income Security Act of 1974 (ERISA).
There are four main 401(k) types that employers can implement. If preferred, you can also offer two or more of these plans to provide the best range of options.
Why offer a 401(k) to your employees? And even further, why do employers match 401(k) contributions?
Providing this benefit to your staff can bring benefits to your company. You'll have a stronger reputation for caring for your employees, plus higher retention rates and increased tax deductions.
Providing a comprehensive benefits package can help increase employee morale and retention by serving as an incentive to remain loyal to the company.
Vesting employer contributions can help encourage your employees to stay loyal to your company for longer. The more years an employee spends at your workplace, the more ownership they have over the contributions you put into their retirement fund. Essentially, their own contributions will always be 100% vested, but they will need to work a certain number of years for your contributions to become vested.
Plus, your organization could save money on hiring new employees with reduced turnover. The average business spent $1,111 per employee on training and onboarding in 2020. By vesting your employees' 401(k) plans, you could have extra money to spend on improvements like better software and new equipment.
Unlike traditional defined-benefit plans, you can deduct every dollar you contribute to your employees' 401(k) accounts. Many companies maximize this benefit by contributing a higher amount. Then, when tax season rolls around, they can take greater deductions.
Plus, for small and medium-sized businesses who still need to create a retirement plan, you might be able to deduct the startup costs using the Credit for Small Employer Pension Plans Startup Costs form.
Whether you offer matching retirement contributions or not, your competitors likely do. As a result, it might be harder to find and attract the talent you want. After all, most job seekers say that benefits and perks are crucial factors in considering job offers.
In a 2017 study, 90% of U.S. employers offered a traditional 401(k) or something similar. Further, 76% of employers with these plans matched their employees' contributions to some degree.
Essentially, if you want to hire top talent, you'll have to give them what they want. Research your competitors to see what they offer and use that information to evaluate whether your company's retirement benefits are hitting the mark.
California currently requires retirement planning through the CalSavers initiative. Employers who do not already sponsor a retirement plan and who have five or more employees are required to register a retirement plan with CalSavers by June 30, 2022.
States that don't already have similar laws in place might have them soon. While none have laws concerning 401(k) company matching, some are moving towards passing legislation that would require companies to provide retirement benefits. Either way, it's wise to stay ahead of changing regulations by establishing your plan before you find yourself paying penalties.
Before beginning the startup process, make sure you do your research. Look into 401(k) management companies that can help you administer your plan and do the bookkeeping for you. If you're not sure who to go with, ask around. Other experts in your field can provide valuable insights into the best solutions for your situation.
Next, you'll need to choose the type of plan you wish to provide. This step depends mainly on what your company can afford to contribute. Employers' most common contribution plan is 50% of an employee's contributions for a certain percentage of their wage. Still, a dollar-for-dollar arrangement might work better for tax reasons.
Before you create your plan, you'll want to consult with a financial advisor to evaluate your program and determine if it's a good fit for your business. Look for someone who takes a holistic approach to finances so you know you can address all your concerns. Once you've determined the best plan for your company, it's time to put it into action.
A 401(k) is an excellent way to provide future security for your employees and benefit your organization. Matching employee contributions can take the plan that one step further to show you care about your staff. We can help you take that step.
At SD Mayer, we service clients from the San Francisco Bay Area and Silicon Valley and provide virtual services to clients from other areas. Schedule a consultation today if you're ready to learn more about how we can help you create a robust benefits plan for your employees.