Employee Benefits

How Does an Employer Benefit From a 401(k) Matching Plan?

August 16, 2022

401(k)s have been steadily replacing pensions as the primary retirement plan offered by most employers. Ultimately, this is a benefit to employers, who are no longer obligated to guarantee an exact payout when an employee retires. Instead, a 401(k) shifts responsibility to the employee, who becomes the main “engine” of contribution and investment, dictating the scale of monthly contributions. 

As 401(k)s continue to gain momentum as the preferred employer (and employee) qualified retirement plan, more states are legislating that employers with more than an established number of employees must offer qualified retirement plans. So far, 13 states require it and 17 have legislation under consideration.

Although the IRS doesn’t require employer “matching” with employee contributions, many companies embrace this approach. Bear in mind that for a matching plan to qualify as legitimate (and tax-deductible) by IRS standards, a sizable percentage of your company’s employees must be enrolled in a company matching arrangement.

Below, we’ll explore the ways that 401(k)s offer concrete financial benefits to employers while also creating opportunities to demonstrate investment in employee wellbeing. We’ll also analyze the ways that some companies are responding to “The Great Resignation” by enhancing or adapting their 401(k) strategies to include more incentives and benefits for current employees and the new hires they would like to attract.

Starting with a Matching Plan: Employer Contribution

The 401(k) is a popular plan among employees because it is the only qualified retirement plan that permits employer-sponsored “matching.” Employer contributions are defined as the percentage or amount of retirement dollars contributed by an employer to an employee’s plan.

Many companies match employee contributions and matching is federally regulated by the Employee Retirement Income Security Act, which was established to ensure fairness in the implementation of company-wide retirement savings plans. 

An employer has a wide range of options in terms of their contribution strategy. Most companies match some percentage of the employee’s contribution, but this typically ranges from 50% to 100% (steady or variable) and often only up to a certain percent of the employee’s eligible earnings (4-6% is most common).

As just one prominent example, Amazon matches 50% of employee contributions up to 4% of eligible earnings made by the employee, and up to the point of the IRS’ contribution limits. Other companies choose a tiered approach (often a more generous one), where the employer matches 100% for the first 3% of the employee’s contribution, then 50% for the remaining 3% of their contribution, accounting for up to a 6% contribution match.

Although employer contributions vary company by company, most research suggests employers in 2022 are “matching” somewhere between 5-6% of employee contributions.

Regardless of which approach you choose, be aware that in 2022, each employee can contribute a maximum of $20,500 to a 401(k). Employers can match up to $40,500 per employee – with a maximum total contribution of $61,000 annually. Any of your employees over the age of 50 can make additional contributions, but they cannot exceed a maximum total contribution of $67,000 annually.

Raising the Bar

Despite the growing prevalence of 401(k)s as the preferred qualified retirement plan offered by employers, many companies are implementing specific features or perks within their matching plans that distinguish them from competition in their industries.

Throughout 2021-2022, as a partial consequence of “The Great Resignation,” some companies have increased their contributions to upwards of 6-8% of the employee’s eligible earnings, adopting this approach as a deliberate benefits and perks incentive. 

Additionally, some companies now assist employees with student loan debt repayment by offering to increase 401(k) contributions until an employee’s student loan debt has been settled.

Another growing 401(k) practice is goal- or merit-based increases to 401(k) plans when employees reach specific goals or organizational benchmarks. Remember that these approaches are just some of the creative adaptations you can make to existing 401(k) plans. Your own company may benefit from developing a “novel” or hybrid approach that is specifically ideal for your workforce, benefits package, or industry.

To learn even more about how employers are using retirement savings and a variety of other benefits/perks to attract and retain employees, please explore our recent article on the “15 Common Employee Benefits and Perks Explained.”

The Value of a 401(k) Matching Plan for Your Business

When 401(k) employer contributions are linked to specific company-wide or departmental goals, they can be used as a powerful incentive to improve productivity. Nevertheless, your foundational 401(k) matching plan should be one that provides sustained benefits to your employees, exceeds what others in your industry are offering, and demonstrates your commitment to your employees’ wellbeing inside and outside of the workplace. Supplemental measures – like increasing 401(k) employer matches while an employee is repaying student loans – show your employees that you are invested in their wellness in the present and future, which inevitably inspires loyalty and employee retention. You also stand to attract new employees who recognize the unique and employee-centric approach your company is taking.

As for the tangible and financial benefits of a 401(k) matching plan, employers can annually deduct matched contributions, as well as any administrative work connected with retirement benefits. 401(k) matching plans can significantly reduce corporate tax burdens on federal, state, and payroll taxes. Additionally, in a company-wide/employee-sponsored 401(k) plan, investment gains and elective deferrals are not taxable (deferred until later distribution). 

Implement a Creative 401(k) Matching Strategy with Payday

Determining how to approach your employer-qualified retirement plan can be a daunting task. From competitor analysis to pinpointing your preferred benefits to evaluating financial feasibility and implementing a streamlined and compliant strategy, it’s natural to feel overwhelmed by the myriad facets of the process. 

Fortunately, our benefits solutions are designed to help your company implement a creative and cost-effective 401(k) matching plan that works for you and your employees. If you’re ready to retain and attract top talent through a retirement plan that distinguishes you in your industry, please contact us today to start our collaboration.

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