Statistics show that 68% of employees in the private sector had access to retirement benefits through their employer in 2021. As part of a comprehensive benefits package, many firms offer a match on contributions to encourage retirement savings and boost employee retention.
One of the benefits that employees find most tempting is an employer contribution match. Given that an employer match is essentially free money, it makes sense. Your contribution as an employer will have a significant impact on how much money your employees have in retirement. Employer matches are relatively widespread, with about 98% of businesses providing the perk to workers.
Continue reading for more information on retirement contributions if you’re considering providing your employees with a contribution match but need help figuring out where to begin or what that entails.
How Contribution Matching Works
An employer may match the employee’s contribution to a specified pay sum or percentage. A company might, for instance, match 50% of an employee’s contribution.
This benefit frequently starts after several years or a vesting period. The funds that an employer has contributed to a 401(k) or other retirement account belong to the employee once they have reached the age of vested benefits. Employees who leave the company forfeit any unvested matching contribution monies to which they may have been entitled. Strong links exist between vesting and employee retention. For instance, stock bonuses might persuade valuable employees to stay with the business for many years, especially if the company is promising and could be purchased or go public in the upcoming year(s), in which case the value of the employee’s stock would increase.
Every retirement plan is different and how much an employer contributes is entirely at their discretion. However, there are two common types of matches that an employer can choose between:
- Partial matching: Up to a specific amount, employers will match a portion of the money contributed by their employees. Employers most frequently contribute 50% of what is put in, up to 6% of the employee’s pay. In other words, the company will match 50% of any contributions, up to 3% of their overall compensation. Employees must contribute 6% of their salaries to receive the entire match.
- Dollar-for-dollar matching: A dollar-for-dollar match, also known as a complete match or 100% match, involves equal contributions from the company and employee. Once more, this applies only up to a particular sum. Dollar-for-dollar up to 4% of the employee’s compensation is one illustration.
Benefits of Matching Your Employees’ Contributions
A 401(k) employer match provides significant tax advantages for employers. As compensation, 401(k) match funds will reduce an employer’s taxable income for the year and, consequently, their tax obligation. Additionally, 401(k) matching can help firms stand out from the competition when attracting top employees. Employer match may tip the balances in favor of one offer over another, particularly when a potential worker is weighing multiple offers.
Employees choose employer matching of their 401(k) contributions over other benefits by a 72.5% to 1% margin, more than any additional financial advantage. The likelihood that workers would remain with their current company is also strongly correlated with their satisfaction with their defined contribution plan, such as a 401(k) with employer match.
Employer Matching Considerations
Employer match contributions are subject to additional employer discretionary contribution regulations on top of the annual aggregate restrictions for employer and employee contributions. Employer matches must pass the Actual Contribution Percentage (ACP) test as part of anti-discrimination regulations to ensure that contributions to Highly Compensated Employees (HCEs) do not exceed contributions to Non-Highly Compensated Employees (NHCEs) by more than 125%.
Employers have some latitude in executing an employer match under other 401(k) discretionary contribution regulations. Employers are permitted to establish a vesting schedule for employer matches, which implies that before employees are qualified to receive the full employer match, they must first complete a specific number of service hours. Vesting can be executed through a graduated vesting plan lasting up to 6 years or a cliff vesting schedule lasting up to 3 years. To qualify for employer matching payments, employees must work a minimum amount of hours every year or on the last day of the year, according to the choice made by the business.
Things to Keep in Mind as a Business
- Employer contributions can be restricted for highly compensated employees (HCEs) who make more than $135,000 in 2022.
- The employer can determine whether employees receive their matching contributions immediately or after completing a defined number of hours of work by creating a “vesting schedule” that specifies when they will start to receive them.
- Employer contributions to 401(k) funds for employees are regarded as business expenses, which can assist in reducing your company’s tax liability.
Communicating with Your Employees
The plan document must be revised whenever modifications are made to your 401(k) plan, including any adjustments you make to your employer match. Employers should inform their employees of any changes. Every eligible employee must get a Summary Plan Description from the Internal Revenue Service (IRS), which explains the specifics of your firm retirement plan in simple terms.
A new Summary Plan Document will be created when you add or modify an employer match and will include information like:
- The effective date of the new employer match
- Requirements for enrollment
- Match fees include details about stretch match arrangements you’ve established straightforwardly
- Vesting timetables, if any
A 401(k) advisor will help you update your Summary Plan Description and plan document. Additionally, you can ask your advisor to inform your employees of any adjustments to your employer match through site visits and one-on-one meetings.
Employer matching, like retirement programs, is not standard and might differ significantly. Consult a plan administrator when deciding what to provide, including the precise match formula and vesting period. Employees are more likely to start contributions when an employer match is available, giving them more time to save money. Overall, a 401(k) match can be beneficial to both employers and employees over time, even though it costs the business money in the short term.
To learn more about what employers should do when it comes to providing retirement benefits to their employees, reach out to Hometown Financial Group today!