Perhaps even more than large institutions, small to mid-size companies are able to offer creative and customized options when it comes to employee benefits. Rather than trying to duplicate what large organizations offer, these companies can usually focus on nimble, low-cost, and original programs that meet the needs employees in their business.
But when it comes to the 401(k) plans, it’s hard to ignore the appeal of the employer match that many big businesses offer. Owners of SMBs may wonder whether it’s beneficial, or even feasible, to provide an employer 401(k) match. As part of your decision-making process, here’s what you need to keep in mind when it comes to providing a match:
Save on taxes and stay on budget: A tax-free bonus
Like every employer, you want to recruit and retain top talent. You also want to reward employees who work hard to build a successful company. With that in mind, it’s tempting to offer bonuses, but for smaller business—especially those that are just getting started—having the budget to pay for bonuses can be difficult to fund.
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A budget-friendly option is to offer a discretionary 401(k) match if the company hits its financial goals each year. A 401(k) match is tax-deductible and untaxed for employers. Just as with personal 401(k) contributions, employees don’t pay taxes on a company match until they withdraw funds.
What’s the standard 401(k) employer contribution? The short answer: companies can decide for themselves how much they will add to an employee’s plan. According survey findings reported by the Society for Human Resource Management, “the most common match today is dollar-for-dollar on the first 6 percent of employee deferrals”, but you can adjust your own matching program to fit your company’s budget and preferences.
Make 401(k) compliance easy: Safe harbor match
The U.S. government wants ensure that 401(k) plans don’t unfairly benefit company owners (key employees) and highly-compensated employees (HCEs). As a result these employees are required to stay within a specific 401(k) contribution rate, as determined by the contribution rate of non-highly compensated employees. In addition, a company must pass annual non-discrimination testing to prove that key employees and HCEs aren’t receiving unfair benefits.
The simplest way to pass 401(k) compliance testing is by providing a safe harbor match. This type of match requires that employers contribute a match or contribution to employees’ accounts as a percentage of their compensation based on specific requirements:
- Company matches 100% of all employee 401(k) contributions, up to 4% of their compensation, or
- Company matches 100% of all employee 401(k) contributions up to 3% of their compensation, plus a 50% match of the next 2% of their compensation, or
- Company contributes 3% of each employee’s compensation, regardless of whether the employee also makes contributions
A safe harbor match helps business owners and HCEs highly maximize tax-deferred contributions without the restrictions of a traditional, non-matching plan. It also helps a business automatically pass non-discrimination testing. There are a few downsides to safe harbor matches including that they require a one-year commitment, involve fees in the event that the safe harbor match is terminated, and may involve higher expenses, based on employee salaries.
A 401(k) provider such as Human Interest can help you determine whether a safe harbor approach is the best employer match for your budget and needs.
Do a nice thing: Encourage good financial habits
If employees aren’t participating in your 401(k) plan, offering a match is one way to increase participation in this benefit offering.
If you decide to offer a match, educating employees about its value is a key part of making the most out of your match. Data from the U.S. Small Business Administration indicates that employees in small companies contributed an average of $4,474 per year to their defined contribution plans in 2006 and had an average plan balance of $32,058. Depending on the match amount, employees’ average yearly investment could significantly increase when an employer matches at least a portion their contribution.
- 401(k) Participation Rates: Why They’re Important and How to Increase Them
- What You Need to Know About the Retirement Crisis
- How to Help Employees with Financial Wellness and Education
As a business owner, it’s important to focus on moving the business forward. If we took a wild guess, there’s probably not enough time in the day to get your real job done, much less become an expert in HR or 401(k) management. So if you make the decision to provide an employer match to the 401(k) your company offers, work with your 401(k) provider to determine what you’re able to match and how to go about setting it up. And if you need to save money by not including a match provision right now, keep it in mind as a powerful incentive to consider offering in the future.
If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.