There’s no denying that when a company offers its employees meaningful benefits, the company is often more successful at employee retention and employee happiness. According to employee benefits research done by Zenefits, companies that use benefits as a strategic tool for recruiting and retaining talent enjoy better overall company performance and above-average effectiveness in recruitment and retention compared to organizations that don’t. In fact:
- The majority of participants (51%) said they are “very unlikely” to accept a job that does not offer benefits
- 28% of respondents said they left a job because of poor benefits packages
The key is to choose the right benefits package for your organization. 401(k) plans remain a consistent offering, and helping navigate retirement savings options can be a critical component of your overall benefits package.
Financial perks as part of a benefits package
Once a business owner determines the type of benefits plan they want to offer (here’s a benefits planning kit to get you started) and finalizes the details of their fiscal benefits, one of the big things to decide is whether to match employee contributions to the 401(k) plan.
Determining whether or not you’ll offer a match is a big decision and there are many factors to consider when it comes to how the match is actually offered.
While an employer contribution isn’t required by law, it’s a great way to show that you are invested in employees’ financial security. Whether you’re rolling out a retirement plan for the first time or brainstorming ways to upgrade your benefits package, there are the big factors to consider before introducing a 401(k) match, and what you need to know if you decide to offer one.
If you’re making the effort and investment to offer a great benefit like a 401(k), research shows your employees are very likely to participate. Participation rates among workers who are offered a 401(k) varies depending on a variety of factors including age and rank. If you’re seeing low participation rates among your employees, offering a match is a great way to encourage enrollment.
Should you offer a 401(k) match?
Many small businesses think they can’t compete with larger companies, whose deep pockets seemingly afford everything—including a generous profit sharing or 401(k) match program. But in the retirement savings world, this isn’t always the case. Here are some reasons why a match program might be a good idea for your small business:
Employer contributions to employees’ 401(k) accounts are not subject to federal, state, and payroll taxes. Further, employer contributions are tax deductible, up to 25 percent of eligible compensation (and also subject to combined limits with employee contributions).
Recruitment and Retention
It’s no secret that the best talent expects the best compensation and benefits packages. Many seasoned professionals expect not only a great 401(k), but a plan that includes an employer match. Not offering a match could limit your talent pool and stifle growth.
Happy employees perform better and generate higher profits. Employees are most productive when they aren’t faced with an uncertain financial future. A 401(k) plan makes it easier for employees to save and think long-term, and employer contributions offload some of the pressure to set aside disposable income. Studies show that happy employees are more productive, helping your bottom line.
Types of Employer Contributions
Businesses have a few options when it comes to offering a match. Here are the major types:
For Peace of Mind: Safe Harbor Contributions
A Safe Harbor 401(k) is designed to ensure all workers receive fair opportunity to benefit from the plan. A Safe Harbor plan design requires making contributions to an employee’s 401(k) as a percentage of their salary. It’s a costly upfront option, but it alleviates a lot of the pressures involved in compliance testing each year. Safe harbor contribution types include:
- Basic Match: Contribute 100% of employee 401(k) deferrals up to the first 3% of salary, then 50% of deferrals of the next 2% of each employee’s salary.
- Enhanced Match: Contribute 100% of employee 401(k) deferrals up to 4% to 6% of their salary.
- Non-Elective Contribution: Contribute at least 3% of each employee’s salary, regardless of their 401(k) deferral.
For Flexibility: Discretionary Matching Contributions
With discretionary matching contributions, you decide what percentage of employee 401(k) deferrals to match and what percentage of pay to match up to, with the flexibility of adjusting the matching rate as your business needs change. For example, many plans choose to match 50% of deferrals up to 6% of compensation. Keep in mind that a matching formula will be easy to enhance over time, but difficult to reduce without negatively affecting employee morale.
For (More) Flexibility: Nonelective Contributions
Each pay period, you have the option of providing a contribution to your employees’ 401(k) accounts based on salary, regardless of their contribution amount. A common type of nonelective contribution is profit sharing, which can either be a percentage of an employee’s salary or a lump sum, typically after year-end. This option is ideal when profits aren’t consistent, but you want to share success with employees when the company does well. Two of the most common profit sharing formulas are:
- Dollar Amount: For example, you allocate $1,000 to each eligible employee.
- Pro Rata (Comp to Comp): You allocate a fixed contribution amount among employees based on their relative salaries.
It’s important to note that you can always start a 401(k) plan without a matching contribution and decide to add one down the road when it makes sense for your business.
Even without a matching contribution, a 401(k) plan can be an effective tool to help your employees save for their future thanks to its beneficial features:
- Convenient. Employee contributions are made through payroll deduction, providing a built-in discipline that makes it easier to save.
- Tax-advantaged flexibility. Most plans allow employees to choose between making contributions on a pre-tax or Roth (after-tax) basis. This means employees can choose to defer taxes and reduce their current income or pay taxes now and make tax-free withdrawals of their contributions in the future.
- High contribution limits and no income limits. Compared to an Individual Retirement Account (IRA), a 401(k) allows individuals to save more than 3 times as much, without regard to income.
This article is provided courtesy of Workest by Zenefits, one of Betterment’s partners. Zenefits helps employers stay on top of all HR, benefits, and payroll in a seamless affordable app. Zenefits believes in empowering small businesses, and offers Free Payroll for a year, for any business who needs it.