What Percent Should Small Business Match on 401(k)?

Small businesses match between 3-6% typically, but you can sponsor a 401(k) plan with no match at all.

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How does small business 401(k) matching work?

Here’s how a small business 401(k) match works:

  • Employers make a matching contribution for employees who are enrolled in the 401(k) plan.
  • If an employee sets aside a portion of their paycheck to be put into the 401(k), the employer “matches” a percentage of the employee’s contribution.
  • If an employee chooses not to divert a portion of their salary into the plan, that employee is not eligible to receive an employer matching contribution.

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.

What is the most common small business 401(k) employer match?

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 $20,500 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 $20,500 would receive a maximum of $2,550 in matching contributions.

Other typical 401(k) matches

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:

  • Matching 50% of employee contributions, up to 6% of the employee’s salary (net 3%)
  • Matching 100% of employee contributions, up to 4% of the employee’s salary (net 4%)
  • Matching 100% of employee contributions, up to 4% of salary and matching 50% on the next 2% of salary (net 5%)
  • Matching 50% of employee contributions, up to the first $2,000 of an employee’s contributions (net $1,000)

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).

The Profit-Sharing Match

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.

What percent should a small business match for a Safe Harbor 401(k) plan?

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:

  • Basic Match:

    100% of employee contributions, up to 3%, plus a 50% match on the next 2%.

  • Enhanced Match:

    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.

Vesting the small business 401(k) match

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:

  • Immediate:

    Employees own 100% of the employer-matched contributions on day one.

  • Graded:

    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.

  • Cliff:

    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.

Employers benefit from 401(k) matching

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.

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Schedule a Free Consultation

Contact Support
Visit our Help Center
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© 2024 Ubiquity Retirement + Savings
44 Montgomery Street, Suite 300
San Francisco, CA 94104