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Big Decision When Starting a 401(k) Plan: to Match or Not to Match

By Stuart Robertson

There is a very common myth that for an employer to offer a 401(k) plan to their employees, they must provide employees a matching contribution. In actuality, an employer is not required to offer a match at all. There are some compelling reasons to offer a match, and there is a big reason not to as well.

Top Reasons to Provide an Employer Match
There are some good reasons why most employers do provide a match or other employer contribution for their employees. These include:

  1. It can be a great way to help encourage everyone to use the plan. Knowing you will receive extra money towards your retirement saving by contributing is something employees value, including owners.
  2. 401(k) benefits help with attracting and retaining top talent. The cost to replace a good employee can be 10 times more than the cost to offer a 401(k) plan. Some employers like to use a vesting schedule to help drive an added incentive to stay.
  3. Employer contributions are typically 100% tax deductible for the business, so it’s a cash flow decision versus a cost item.
  4. How much you match can be a very little or a lot – it’s flexible to fit your business needs. Some do a fifty-cent match on each dollar for the first 3% of salary an employee contributes, while others might do a dollar for dollar match for the first 5% or more of salary contributed to their 401(k).
  5. Perhaps as powerful a reason as any to provide a match – owners and highly compensated employees (those earning more than $130K per year) may be restricted by how much they can contribute to your 401(k) plan without a match. 401(k)s have guard rails to ensure all employees that use your 401(k) are benefiting fairly. Generally, highly compensated employees (HCEs) may only contribute 2% more than the employee average salary deferral amount. So, if the average of your participating staff is a 4% contribution of their salary, the owner and highly compensated employees would likely be restricted to contributing up to 6% of their earnings. This may mean the HCEs are unable to contribute an amount near the 401(k) limit of $19,500 in 2020.

This last reason is why many small and mid-sized employers choose to provide a 3-4% immediately vesting match – better known as a safe harbor 401(k) plan. By providing a safe harbor qualifying match, owners and highly compensated employees can maximize their tax-deferred contributions in their own 401(k) account. This helps lower this year's taxes, put away a more meaningful amount for retirement, and automatically satisfy IRS discrimination tests.

There are some very good reasons why some businesses choose to match but do not go the safe harbor route. Some like to use a two- to four-year vesting schedule to encourage employee retention or to better manage the program due to seasonal staff or other variables.

Top Reason Not to Match
Cash is king and cash flow is a big reason not to provide a match. Highly seasonal businesses or businesses that are cash strapped at the moment, may not have the money to front for the match. Some businesses are cyclical, and while this year might be great, the next may not be, so that can drive cash flow concerns.

Even if you don’t provide a match, 401(k)s enable your team to save automatically with each payroll and take advantage of the higher contribution limits of 401(k)s versus those of an IRA. Also know, that some businesses do an end of year 401(k) profit share based on how the business performed to provide incentive. This can be $0 in tough years, and something exciting for all in good years. Regardless, matching is not required, and if it doesn’t fit your business, that’s just fine. It can still be a great benefit for your whole team.

The important thing to know is you have options to offer a meaningful benefit to you and your employees. If you decide to do so, there are many great ways to design a match for your 401(k) plan to meet your business needs. Happy saving.


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