Can You Contribute a Company Match for Your Employees?
There are many reasons that employers would want to offer 401(k) matching contributions to their employees’ retirement funds: It’s not only a great way to reward loyal employees and reduce turnover, but it also helps attract new talent for whom a competitive benefits package is a must. But how do employers know if they qualify to offer a 401(k) match?
The ability to offer a 401(k) company match depends upon:
- Your plan
- Employee eligibility
- Annual IRS limit
- Employee compensation
- Vesting schedules
The terms of a 401(k) match may vary considerably. The plan you drew up with the plan administrator will detail the exact formula and stipulations. As the employer, you may change the terms at any time, though you will need to provide notice to all employees within 60 days of making the change.
A typical match is 25%, 50%, or 100% of the employee’s contribution amount, up to a limit of total employee salary. For instance, one common formula is 100% match on the first 2% of contributions, and 50% match on the next 4%.
If your plan includes additional non-elective deferrals or profit shares that are not included in the match formula, you will need to factor these amounts into the overall IRS limit calculation to ensure you do not exceed it.
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Employees can be eligible to receive an employer’s 401(k) match if they:
- Are at least 21 years of age.
- Have completed at least 1,000 hours of service over the last 12 months.
- Have worked 500 hours or more hours for three consecutive years.
2022 IRS Limit
Employees are allowed to contribute up to $20,500 toward their 401(k) plans in 2022—with an additional $6,500 allowed for employees aged 50 or older.
Employer matches are provided on top of this amount, but the total combined employer/employee amount cannot exceed $57,000 (up to age 50) or $63,500 (age 50 or older).
Up to 100% of an employee’s salary may be contributed as a 401(k) match bonus—or the IRS limit, whichever comes first.
Employee Compensation Limits
The IRS adjusts the maximum employee compensation limit each year based on the cost of living. For 2022, the limit has increased to $305,000, meaning any amount of compensation above this amount isn’t eligible for contribution.
Employees earning more than the limit can contribute their maximum salary deferral, with the employer’s matching contribution applying up to this limit. So, if you’re earning $400,000 and your employer offers a 5% match on your contributions, your employer match will be limited to $15,250 (5% of $305,000) instead of $20,000 (5% of $400,000).
It’s also important to consider matching contributions for Highly Compensated Employees (HCEs). Any employee who owns over 5% of the business or who makes more than $135,000 in 2022 is considered to be an HCE. In order for the plan to remain ERISA compliant, HCEs cannot contribute more than 2% more of their salary than the average non-HCE.
Some small business 401k plans are drawn up to include immediate vesting, but more commonly, employers create a vesting period ranging from one to six years that uses the money saved by not vesting short-term employees to reward loyal, long-term employees. Individuals who leave the company before the match kicks in do not receive any employer funds. Employees may contribute to their own accounts as they please. However, employer vesting can occur gradually or all at once.
Ubiquity has a long track record of helping employers and employees get the most out of their small business retirement plans. Reach out today to learn how easy it can be to start a low-fee 401(k) with company matching funds.