In a world where compensation and benefits are the No. 1 way to attract and keep top talent, 401(k) matching tops the list when it comes to meaningful perks with value that grow over time. While an employer contribution isn’t required by law, it’s a great way to show you’re invested in employees’ long-term happiness and financial security.
Whether you’re rolling out a retirement plan for the first time or brainstorming ways to upgrade your benefits package, here are the big factors to consider before introducing a 401(k) match, and what you need to know if you decide to offer one.
Many small businesses think they can’t compete with larger companies, whose deep pockets seemingly afford everything — including a generous profit sharing or 401(k) match program. But, in the retirement savings world, this isn’t always the case (In fact, 52 percent of Guideline’s small business clients provide a match!).
Here are some reasons why a match program might be a good idea for your small business:
Every dollar you contribute to an employee’s 401(k) is exempt from federal, state and payroll taxes. You can deduct up to 25 percent of compensation paid during the year to eligible participating employees as an employer match or profit sharing program from your business income taxes.
It’s no secret that the best talent expects the best compensation packages. People are twice as likely to be satisfied with their jobs when they’re happy with its benefits. What’s more, seasoned professionals expect not only a great 401(k), but a plan that includes an employer match.
Happy employees perform better and generate higher profits. Think about it — any person is more productive when he or she isn’t faced with an uncertain financial future. Nine out of 10 households believe having a 401(k) makes it easier to save and think long-term, and employer contributions offload some of the pressure to set aside disposable income.
If you’re making the effort and investment to offer a 401(k), obviously the hope is that your employees will use it. But, according to the Department of Labor, about 30 percent of eligible American workers do not participate in their workplace retirement plans. If you’re seeing low participation rates among your employees, offering a match is a great way to encourage enrollment.
Businesses have a few options when it comes to offering a match. Here are the major types:
Safe Harbor 401(k) plans are designed to ensure all workers receive fair opportunity to benefit from the plan. A Safe Harbor match requires making contributions to employee 401(k) accounts as a percentage of their salary. It’s can be a costly upfront option, but the easiest way to make sure you pass compliance testing each year. Qualifying employer contribution types include:
With discretionary matching contributions, you decide what percentage of employee 401(k) deferrals or salary to match, with the flexibility of adjusting the matching amount as your business needs change. Keep in mind, a matching level will be easy to increase over time, but difficult to reduce without negatively affecting employee morale.
Each pay period, you have the option of providing a contribution to your employees’ 401(k) accounts based on salary, regardless of their contribution amount. A common type of nonelective contribution is profit sharing, which can either be a percentage of an employee’s salary or a discretionary lump sum, typically after year-end. This option is ideal when profits aren’t consistent, but you want to share success with employees when the company does well. The IRS allows several types of discretionary profit sharing formulas; here are the most common:
It’s important to note that some companies do not provide a match at all. It’s not required by law. You can always start a 401(k) plan without matching, and later decide to add one down the road when it makes sense for your business.
This article was originally published on Entrepreneur.