Advantages of Offering a Matching Contribution in Your Small Business 401(k) Plan

Author: Siân Killingsworth / 5 Apr 2023 / 401(k) Plan Information, Small Business 401k

As a small business owner, you may consider offering your employees a 401(k) plan. Which means you’ve probably wondered whether or not you should offer a matching contribution. While it may seem counterintuitive, offering a match can actually help you save money on taxes, hiring and onboarding costs, and more–making it a smart investment for any small business.

What is a Matching Contribution?

Glad you asked! A matching contribution is your contribution to an employee’s 401(k) plan. You can match a certain percentage of the employee’s contribution up to a predetermined limit.

For example, let’s say your small business offers a 401(k) plan with a matching contribution of 50% of the employee’s contribution, up to 4% of their salary. If an employee contributes 4% of their salary to their 401(k) plan, you would contribute an additional 2% of their salary.

If the employee contributes less than 4% of their salary, you’d match their contribution up to 2% of their salary. (For more information on offering an employee match, here’s how much other small businesses are matching in 2023.)

Advantages of Offering a Matching Contribution

1. Attract and retain employees (and get a competitive advantage)

Offering a matching contribution can be a powerful recruitment tool. Employees are more likely to choose a job that offers benefits like a 401(k) plan, and even more likely to choose one that offers a matching contribution.

In addition, a matching contribution can help retain employees by providing a valuable benefit they may not find at other small businesses, and you may even find that offering a 401(k) match makes your small business more competitive with larger companies when it comes to hiring top talent.

2. Encourage employee participation in the plan

One of the challenges of offering a 401(k) plan is getting employees to participate. However, offering a matching contribution can be a strong incentive for employees to contribute to their plan. When employees see that their employer is willing to match their contributions, they are more likely to contribute themselves.

3. Increase overall retirement savings

A matching contribution can help employees save more for retirement. When you contribute to your employee’s 401(k) plans, it increases the total amount of money they have, helping them build a larger nest egg for the future.

4. Benefits for both the employer and employee

Offering a matching contribution can provide significant benefits for you and your employees. Your contributions to an employee’s 401(k) plan are tax-deductible, which can lower your company’s taxable income.

For the employee, the benefit is pretty obvious: free money. This can be calculated as part of an employee’s total compensation package and is very attractive to prospective new hires.

How to determine the matching contribution amount

When deciding on the matching contribution amount for your small business 401(k) plan, there are a few factors to consider, including:

• Your budget.
• How many employees you have.
• Employee demographics (like proximity to retirement age).

It’s important to find a balance between a matching contribution that is attractive to employees and one that is affordable for your business. (Don’t forget that contributions you make to your employee’s 401(k)s are tax deductible.)

And if your plan has a Safe Harbor provision, that mandates an employer contribution but rewards you with exemption from certain annual IRS tests that would otherwise be mandatory.

We recommend finding a provider with low fees, transparent pricing, and excellent customer service (so… call us.)

 

Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.