Key Takeaways
Despite initial costs, a 401(k) match may pay off over time for companies looking to attract and retain talent.
Offering a 401(k) match can often be viewed by prospective and current employees as an investment in their financial well-being.
In addition to boosting recruitment and retention, a match may also provide tax advantages and simplify plan compliance.
Business owners and benefits providers have begun to realize a 401(k) plan shows investment in their employees. According to an online survey conducted by OnePoll and Human Interest, retirement plans are the most wanted benefit after health insurance. One key piece determining the value of the 401(k) to employees is an employer match—or contributions that an employer makes into the account (that may be in addition to any employee’s contributions).
Offering a 401(k) employer match is optional, and you can add one when starting a plan or provide it later. This article explains how an employer match can enhance hiring and retention, helping small and medium-sized businesses stand out from competitors that don’t offer this benefit. Plus, with its tax advantages, an employer match may cost less than expected, making it a cost-effective way to invest in your team through increased recruitment, retention, and employee engagement.
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1. Employer match contributions are tax-deductible
Employer contributions to a 401(k) plan aren’t just an employee perk—they also offer tax benefits for your business. One of the most significant perks of an employer match is that companies can deduct matching contributions on their federal income tax returns up to a specific amount determined by the IRS (or up to 25% of the total compensation paid to employees).
This deduction applies to all types of employer contributions, whether you’re matching a portion of employee contributions or providing a non-elective contribution that does not require employee participation to receive (more on this below).
2. Legislation can help incentivize employer matches
SECURE Act 2.0 introduced a valuable new tax credit to encourage small businesses to offer retirement plans by covering part of their contributions. The credit aims to support businesses in realizing an employer match's benefits while mitigating financial concerns.
Under the provision, employers with up to 50 employees can receive a tax credit for contributions made on behalf of employees earning less than $100,000 annually. The credit is available for the first five years of the plan, with a maximum of $1,000 per year per employee. Eligible employers between 51 and 100 employees may also qualify for a credit phase-in.
Learn more about expanded SECURE Act small business tax incentives.
3. An employer match can help boost plan participation
Offering an employer match encourages employees to participate in retirement savings plans. At Human Interest, we believe that increasing plan participation is a net positive for all involved. While the primary benefit of a 401(k) plan is to help employees save for retirement, employer contributions can help increase participation rates compared to plans without one. Employees may feel motivated to contribute because they see it as free money—every dollar they contribute is matched, increasing the value of their savings efforts.
Additionally, an employer match pairs well with features like automatic enrollment, further encouraging participation. Behavioral economics shows that people are more likely to save when they feel incentivized in the short term while securing long-term financial benefits.
4. An employer match can help attract new talent
In the effort to bring the right people into your company, there are two things to keep in mind:
Employees are aware of and concerned about their retirement savings options (as mentioned above, employees consider retirement plans the second most-wanted benefit after health insurance).
With the advent of state retirement mandates, more small- and mid-sized employers are offering retirement benefits.
The result for employers is the need to take extra steps to stand out to potential employees, and this is where an employer match can be impactful. A 401(k) is a powerful benefit by itself, but when coupled with the attractiveness of a matching contribution, it can catch the eye of top talent. Plus, the reality is that prospective employees most likely want an employer match. According to a 2022 survey from Principal, employees rank a company 401(k) plan match as the most critical factor when reaching retirement goals.
5. Employer contributions can streamline 401(k) compliance
Employer contributions may help simplify retirement plan compliance by helping plans pass annual nondiscrimination tests and encouraging balanced employee participation. Employers can automatically meet compliance requirements by offering matching or safe harbor contributions, reducing the need for specific IRS annual testing. Additionally, strategic contributions help prevent plans from becoming "top-heavy," minimizing the need for complex compliance measures and supporting a fair, accessible retirement plan for all employees.
A safe harbor plan can help simplify compliance
A safe harbor 401(k) plan provision helps employers automatically pass key nondiscrimination tests required by the IRS. In other words, providing a fixed, mandatory contribution can help employers simplify and streamline annual IRS plan compliance.
In a safe harbor 401(k) plan, employers are required to provide a contribution, which, in most cases, is required to be immediately 100% vested. That contribution can be either:
A safe harbor matching contribution: This type of contribution is based on how much an employee chooses to defer and put into their 401(k). There are two matching options:
Basic match: Employer matching contributions are a 100% match on the first 3% of compensation plus a 50% match on deferrals between 3% and 5% (4% of total compensation).
Enhanced match: Employer matching contributions must be at least as much as the basic match at each tier of the match formula. A common formula is a 100% match on the first 4% of compensation.
A safe harbor nonelective contribution: Regardless of whether or not an employee contributes anything to their 401(k), the employer contributes 3% (or more) of that employee’s eligible annual compensation.
Though safe harbor contributions require a financial commitment, they help ensure business owners can maximize their personal retirement savings without testing worries. Want to learn how much a safe harbor plan would cost your business? Use our tool to calculate your costs.
How much does a safe harbor cost?
Use our free safe harbor calculator to find out.
6. Most employers offer an employer match
The vast majority of employers who offer defined contribution plans make employer contributions to their employees’ accounts. According to Vanguard’s How America Saves 2024 report, 96% of plans (covering 99% of participants) offered some sort of employer contributions as part of their employee benefits package. Taking this one step further, 50% of plans offered matching contributions, 10% offered non-elective contributions, 36% offered both matching and non-elective contributions, and 4% offered neither option.
7. Employer matches can be designed around company needs
Regardless of whether or not automatic enrollment is part of a 401(k) plan, the details of employer contributions can often be customized to fit a company’s needs. For example, employers can establish a vesting schedule to determine if contributions are owned by the participant immediately or until after a waiting period.
If there is a vesting schedule and, if the employee leaves before the contributions become fully vested, then some portion of the matched contributions is forfeited to the plan. While some plans offer immediate vesting, some have a specified period of time (e.g., one year) before an employee is vested, while others can offer a graduated approach, with an increasing portion of the employer match becoming owned by the employee over time (e.g., 20% of the contribution with each year of service).
Vesting schedules have pros and cons, but when designed wisely, they can serve as a powerful employee retention tool. If your 401(k) plan has what feels like a delayed vesting schedule or an uncompetitive match, employees may determine that the plan isn’t worth their participation. They may also opt to work for a company that provides immediate vesting or a schedule that better meets their retirement investment goals. We suggest that employers consider the opinions of current and future employees in their decision-making process.
8. Employers may choose from different match formulas
What’s the standard 401(k) employer match? The short answer: companies can decide for themselves how much they will add to an employee’s plan. Employer 401(k) match programs usually incorporate two figures when calculating a total possible match contribution: a percentage of the employee’s own contribution and a percentage of the employee’s salary.
While a dollar-for-dollar match (e.g., a single-tier formula) may be the simplest and most common kind according to data below, it is not the only option:
| Match Type | Example Formula | Percentage of Plans Using This Type |
|---|---|---|
| Single-tier formula | $0.50 per dollar on the first 6% of pay | 70% |
| Multi-tier formula | $1.00 per dollar on the first 3% of pay; $0.50 per dollar on the next 2% of pay | 23% |
| Dollar cap | Single- or multi-tier formula with a $2,000 maximum | 6% |
| Other | Variable formula, based on age, tenure or similar vehicles | 1% |
9. You can set limits with an employer match
In addition to match formulas, the main rules regarding 401(k) contributions often revolve around contribution limits. Generally speaking, an employer matching contribution does not count towards the maximum contribution limit amount. The IRS limits total contributions from both the employer and the employee, meaning total contributions can't exceed either:
100% of an employee's salary, or
The limit for defined contributions plans as outlined in section 415(c)(1)(A) ($69,000 in 2024)
In addition to the total employee and employer contribution limit of $69,000, workers 50 years and older are still eligible for a catch-up contribution ($7,500 in 2024). This means that, including catch-up contributions, the maximum total of employer and employee contributions is $76,500 in 2024.
10. 401(k) bonuses are not subject to certain withholdings
Bonuses can be powerful incentives for employee retention, especially when structured with specific goals, vesting schedules—or even as part of a contribution to their 401(k). When an employer contributes an employee's bonus directly to their 401(k), it often avoids federal and state income tax withholding until withdrawal (though it is still subject to Social Security and Medicare (FICA) taxes). This can help save employers approximately 6% on the bonus amount by reducing FICA obligations allowing them to take another tax deduction for the contribution. For employees, it reduces taxable income in the current year while boosting retirement savings.
Save on taxes and stay on budget: A tax-free bonus
Like most employers, you want to recruit and retain top talent. You probably also want to reward employees who work hard. With that in mind, it’s tempting to offer bonuses, but for smaller businesses—especially those that are just getting started—finding the budget to pay for bonuses can be difficult. One of the main advantages of providing an employer contribution is to attract and retain top talent. Offering partial or full contributions can help employers recruit dedicated, motivated employees, which could help save money in the long run.
Offering a 401(k) match isn’t just a financial commitment—it’s an investment in your team. It can boost participation, increase retention, and save your company money through tax advantages and lower turnover. If you’re looking for a way to attract and retain top talent without breaking the bank, a 401(k) match might just be the perfect solution. If you’re interested in starting a 401(k) that has an employer match with Human Interest, get started today.
Start a 401(k) with Human Interest
A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.
Article By
The Human Interest TeamWe believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.
