Small businesses match between 3-6% typically, but you can sponsor a 401(k) plan with no match at all.
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Here’s how a small business 401(k) match works:
Unlike a pension, employers are under no obligation to contribute to employees’ 401(k) accounts. The one exception is the Safe Harbor 401(k)s, which mandates the match, but excludes the employer from annual compliance testing.
Flexibility in choosing the match and the vesting schedule makes the overall expense of offering this benefit much more manageable.
As of 2020, the average matching contribution was 4.3% of a person’s pay.
The most common formula was 50 cents on the dollar, up to 6% of employee pay. So, for example, an employee earning $85,000 who contributed the maximum $19,500 would receive up to $5,100 in employer match.
Some small businesses matched dollar-for-dollar, up to 3%. That same $85,000 earner who contributes $19,500 would receive a maximum of $2,550 in matching contributions.
There is much variation among employers regarding the amount of matching contributions they make to their 401(k) plan.
No set amount is required unless the plan is a Safe Harbor 401(k) plan, but here are some commonly used matching contribution formulas:
Tiered structures are common. For instance, a generous match might be a dollar-for-dollar match on the first 3% of an employee’s deposit, followed by 50 cents on each dollar for the next 3% (up to 6% employee contributions in total).
Making contributions based on a profit-sharing arrangement is another common strategy. Matching funds can be modified or canceled based on the employer’s discretion, depending on how well the company does that year. Employers can match up to a set dollar amount, which helps remain in compliance when contributing to Highly-Compensated Employees.
In exchange for getting a free pass on ADP and ACP testing and the extra administrative duties that go along with it, in a Safe Harbor 401(k) plan business owners must agree to make a minimum contribution to employee plans each year. The match must be 100% vested.
Business owners can choose from the following Safe Harbor matching contribution formulas:
100% of employee contributions, up to 3%, plus a 50% match on the next 2%.
100% of employee contributions, up to 4% of compensation.
Additional formulas may be available, depending on the plan. Nonelective contributions can be made to a Safe Harbor plan, even if employees themselves are not saving; the company must contribute at least 3% of each employee’s compensation to all eligible participants.
If employee retention is one of your top goals – not just recruitment – then a vesting schedule makes sense. Under this arrangement, 100% of employee contributions are vested into the plan immediately, meaning the money belongs to them. However, the employer match funds can revert back to the employer if the employee is terminated or quits before the vesting schedule begins.
Vesting schedules can be:
Employees own 100% of the employer-matched contributions on day one.
Employees own a growing percentage of the employer match over time. For instance, the employee may own 25% of the match after one year, 50% after two years, and so on. Employers must vest employees at least 20% by the end of two years and 100% by the end of six years.
Employees become fully vested after three years of employment in an all-or-nothing scenario.
No matter what you choose, vesting schedules must be clearly explained in the employer’s 401(k) plan document.
The 401(k) match is an attractive recruiting benefit that is affordable for employers to give, considering they can write off the full match as a corporate deduction at tax time. Likewise, employees receive the benefit and gain interest on it before they are required to pay tax on it when withdrawing in retirement.
Contact Ubiquity for information on low-cost, flat fee small business 401(k) administration. Whether you want to offer competitive and generous benefits or increase employee participation to pass annual compliance testing, the employer match is an ideal move.
If you are a small business owner and need a retirement plan for yourself and your company, only Ubiquity offers flat-fee plans, plus expert guidance along the way.
We will fully customize your plan to meet the specific needs of your small business.
Setting up a 401(k) can be complicated. Only Ubiquity gives small business owners access to retirement experts in addition to industry-leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.