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


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.

But there are some good reasons why most employers do provide a match or other employer contribution for their employees. First, it can be a great way to help everyone save and retain talent. Second, owners and highly compensated employees may be restricted by how much they can contribute to the plan without a match -- generally by about 2% more than the employee average deferral amount. So if the average of the participating staff is 5% of their salary, the owner and highly compensated employees would likely be restricted to contributing up to 7% of their earnings. This is why most small and mid-sized employers choose to provide a 3-4% immediately vesting match – better known as a safe harbor 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 (helping lower this year's taxes) and automatically satisfy IRS discrimination tests.

Also, it’s good to know that matching and other employer contributions, such as a 401(k) profit share, are tax deductible for the business which helps minimize the cost.

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 three or four year vesting schedule to encourage employee retention or better manage expenses due to seasonal staff. Some prefer not to match or offer a minimal match, and then based on how the business performs, provide an annual profit share into the 401(k) plan.

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 40(k) plan to meet your business needs. Happy saving.

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