Why Do Employers Match 401(k)?
When looking for a job, potential employees are very interested in what you can offer them when applying for positions at your company. Some of the obvious draws include higher salaries, convenient locations relative to their living situations, and medical benefits. However, there is another benefit that is highly prized in the job market that many businesses offer to pull the best talent: employer-matched 401(k) benefits.
Let’s take a closer look at employer-matched 401(k) plans, and a few of the many benefits companies can reap by offering matching benefits.
What is a 401(k)?
A 401(k) is a retirement savings plan that is typically offered to individuals by their employers. It was established in the tax code and draws its name from the specific section of the code that this retirement plan originates from.
Through the program, employees get tax breaks on any money they contribute, and they don’t need to worry about setting aside monthly payments to the plan because withdraws are automatically pulled from their paychecks. The tax breaks employees receive can come either at first contribution or when the money is withdrawn later in the individual’s retirement. The difference will depend on the specific plan type you have.
Additionally, 401(k) plans are not limitless funds. Every year, annual contribution limits are set to prevent individuals from pouring an excess amount of money into their plans. For 2021 this number was set to $19,500 and increased to $20,500 for 2022.
Types of 401(k) Plans
There are several different variations on 401(k) plans. Two of the most common are the traditional 401(k) and the Roth 401(k). Each of these works to grow your employees’ retirement funds, but provide their benefits in different ways.
Traditional 401(k) Plans
With a traditional 401(k), the tax break is granted upfront. This means that whatever money you invest in your 401(k) is pulled from your paycheck before the IRS deducts income taxes. Having your retirement plan funds come out of your paycheck not only increases the amount of money you can contribute to your plan, but also reduces your overall income tax because you’re being taxed only for the money left over after your 401(k) contributions. However, you will eventually need to pay taxes on this money when you withdraw it down the line.
Roth 401(k) Plans
Unlike the traditional 401(k), Roth plans have all taxes pulled out of your paycheck immediately–before any contributions are made. This may seem like a worse deal in the beginning because it looks like less money is being saved, but unlike traditional plans, employees can keep anything left in a Roth 401(k). Remember: the IRS can only charge your paycheck for taxes once. After tax money is pulled from your paycheck and money is placed into your Roth 401(k), all that’s left belongs to the account holder.
What is Employer Matching?
On top of some very nice tax breaks, there is another key benefit that often comes with 401(k) plans: employer matching. This is a perk that means the employer will place extra money into their employees’ 401(k) plans to further grow the accounts. Typically, companies will offer a dollar-to-dollar bonus going up to a certain percent of the contribution. However, others may choose to contribute lesser amounts.
Benefits to Matching 401(k) Contributions
There are several benefits to matching your employees’ 401(k) contributions. These include recruiting the best talent, promoting company loyalty, and employer tax benefits.
Recruiting Top Talent
When individuals are looking for new jobs, they consider salary but typically choose to work for those companies that are going to provide them with the best benefits. By offering matching 401(k) benefits, you show potential applicants that your company cares about them beyond their role as employees.
Promoting Company Loyalty
Similarly with recruiting top talent, offering matching 401(k) benefits to current employees shows them that your company cares about their future enough to literally invest in it. By setting aside money for your employees to use when they no longer work for you, you show them that they matter. This can promote higher levels of loyalty to your company, thereby reducing your turnover rates, the amounts of new hire training you need to conduct, and a whole host of other related expenses.
Employer Tax Benefits
While 401(k)s offer great tax breaks to employees, they also benefit employers. The money your company puts toward your employees’ retirement plans, along with any administrative costs associated with handling the paperwork, is tax-deductible at the end of the fiscal year, thereby making your company more profitable.
Employee Benefits Made Easy
At Beckham Insurance Group, our knowledgeable and experienced employee benefits representatives are here to help make your benefits administration as easy and stress-free as possible. Contact us today to learn more about how we can help you build a competitive and comprehensive benefits program.
