In 2012, New York City community organization 92Y and the United Nations Foundation launched Giving Tuesday. Held this year on Dec. 2, Giving Tuesday is an initiative that has united more than 16,000 partners with one common purpose: to celebrate a day of global giving.
That businesses like to give back during the holiday season is not a big surprise. Generosity is a great way to celebrate success and show appreciation to those who make that success possible—the organization’s employees and community that supports it. In fact, the most successful companies find ways to make employees feel appreciated and valued throughout the year. Offering an employer match of an employee’s retirement contributions can be a great way to do this.
Employers who offer an employer match enjoy two advantages. First, the additional compensation for participating in the retirement plan can help companies attract talent who demand competitive compensation packages. In addition, adding a vesting option to the plan, which requires employees to remain with the company for a certain period in order to retain those matches, fosters employee retention.
Understanding employer matches
Matches can work in a number of ways. Employers can match a percentage or all of an employee’s contributions up to a certain amount, such as the first 3 percent or 6 percent of salary. Employees can contribute more than the employer match amount, up to the maximum contribution allowed by the Internal Revenue Service.
In 2014, the maximum allowed contribution for traditional 401(k) plans is $17,500, including employer contributions. Employees over age 50 may also make catch-up contributions of $5,500 for 2013 and 2014 to traditional 401(k) plans. In addition, the IRS limits annual contributions to all accounts, including elective deferrals, employee contributions, employer matching, discretionary contributions and allocations of forfeitures. These may not exceed the lesser of either 100 percent of your compensation or $52,000 for 2014.
Whether to offer an employer match and how much to offer depends on a few factors. First, what’s the expectation in your industry? In high-earning sectors, it may be expected and actually be a detriment to your hiring ability if you don’t offer such incentives. In addition, you need to determine how much your firm can afford. It’s a good idea to consult a financial adviser when structuring the right program for your company and your employees.
Structuring matching contributions
Matches may be structured in a variety of ways. Employers may match 100 percent of the employee’s plan contributions up to a certain percentage, such as three percent or six percent of their salary. For example, if ABC Contracting Company offers a 100 percent match up to the first six percent of contributions, here’s how that would affect two employees with different salaries and contribution rates:
Employers may choose to match any percentage of the employee’s contribution up to a certain amount—the flexibility lies with the employer. However, it’s essential that companies ensure matches and access provisions are uniformly applied according to the law and the company’s own policies.
Another consideration companies need to make is when it will pay the matches. Will these be paid as the employee contribution is made or on a quarterly, annual or other basis? Again, this is a matter that should be discussed with your financial adviser to ensure you’re in compliance with the law and managing the program in the best possible way for your company and employees.
One of the great advantages of a 401(k) plan for employees is that the contributions are made with pretax dollars, so it costs roughly 60 cents to invest a dollar (at an incremental income tax rate of 40 percent). When you add the employer match, the employee could be paying 60 cents to invest $2 (assuming a 100 percent match). Employees don’t pay taxes on contributions and the employer match until funds are withdrawn from the 401(k), generally during retirement. This is a great incentive for employees and something that will help you attract people with the highest-caliber skills. Perhaps more important, it shows that you value your employees and are willing to generously invest in helping them achieve their long-term financial goals.
So, consider offering a 401(k) plan or increasing the employer match on an existing 401(k). The payoff will be threefold: You’ll be able to attract better employees, you’ll do a better job retaining your best employees, and your business, powered by motivated employees, could become more profitable.
James Barger is president of KeyBank’s Rochester market. He may be reached by phone at (585) 238-4121 or email@example.com.
EMPLOYEE JOHN MARY
Employee salary: $50,000 $100,000
Employee contribution: 10% of salary 4% of salary
Total employee contribution: $5,000 $4,000
100% employer match (up to 6% of salary) $3,000 $4,000
Total Contribution $8,000 $8,000
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