Your company’s 401(k) is an employee benefit that is valued by your employees. The better the quality of the plan, the more likely that your employees will perceive it as a key employee benefit and as a perk of working for your organization. One feature that is offered by many plans is an employer matching contribution. Here are several reasons why employers offer a match.
4 Reasons Employers Match a 401(k)
Attracting and Retaining Employees
A significant number of employees cite the quality of an employer’s 401(k) plan as a reason they chose to work with this employer over another employer they might have been considering. Employees also cite the quality of the plan as a reason to stay with that employer. An employer match enhances the quality of the plan in the eyes of many employees. Much has been written about how taking full advantage of the employer’s match is essentially free money and certainly many plan participants have seen this in articles they have read. A good plan, with a good-sized match that vests on a graded vesting schedule after five years can all combine to incentivize employees to stay with your organization.
The competition is doing it
Companies who compete for top employees need to be competitive in the compensation and benefits they offer. This includes a top 401(k) plan with a competitive match. The companies with whom you are competing for top talent are likely offering a 401(k) with a solid match, if you are not this may raise questions in the minds of workers you are trying to recruit.
It may also play into the decision of current employees to stay with your firm or move to a competitor who offers a healthy match, along with other competitive benefits and compensation.
Matches to a 401(k) plan are a tax deductible expense for an employer as long as they do not exceed IRS mandated levels for the plan year. For 2021, employer contributions can be based on an employee’s compensation up to $290,000. Matching contributions may also be deductible for state taxes and may be exempt from some types of payroll taxes.
In the case of a business owner, matching contributions can be a way to funnel additional contributions to their retirement account with these contributions being a deductible expense for the business. This can be especially valuable with an age-weighted plan that is designed to tilt a higher percentage of the employer’s contributions towards them.
Helping Employees Retire
Helping their employees get to a point where they are financially able to retire has become a priority for many organizations. Besides being a good thing to do, helping employees on the path to be able to retire helps the organization in two ways:
· Knowing they are on a solid path to retirement can help alleviate financial stress among employees, a major cause of lost productivity in the workplace.
· Helping to get employees on a path to being able to retire on time helps alleviate issues that can arise when more experienced workers continue to stay on due to the fact that they can’t afford to retire. This can create issues with the career paths of younger talent who may be ready to assume positions of greater responsibility but are shut out of these jobs due to a log jam of older workers in those spots. Employer’s may face the unpleasant choice of whether to fire or demote these long-time workers or risk losing these promising younger employees to better opportunities elsewhere.
The employer match can be a key tool in helping your organization’s employees on their path to being able to retire on time. A solid match combined with employee financial education and other tools can help get your employees to a position where they can feel good about moving into retirement.
A 401(k) match is generally thought of as an added benefit for the company’s employees. Offering a solid matching contribution is also beneficial for the employer. It can help attract and retain top employees for your organization. A solid match can also be part of your company’s efforts to help employees reach their retirement goals.
We are happy to help you design the best 401(k) matching strategy for your company.
Shelton Capital Management does not provide accounting or tax advice to its clients. All clients should be aware that tax treatment is subject to change by law, in the future or retroactively, and clients should consult with their tax advisors regarding any potential strategy, investment or transaction.