How much should I match my employees contributions and why

How much should I match my employees contributions and why

Written by The Peppermint Team

Peppermint was created by a group of business owners, entrepreneurs, and benefits experts who have been on both sides of the table as employees and employers.

April 7, 2022

Have you ever wondered why some companies match their employees’ retirement plan contributions even though they have the option not to? As a business, doesn’t that mean spending more money? 

In this article, we’ll help you answer that burning question when it comes to choosing a Poled Employer Plan (PEP) option: What is the advantage of matching employees’ contributions? 

We’ll answer that and more, but first, let’s discuss the benefits you get from contributing to your employees’ retirement plans.

 

What Do Employers Like You Gain From Contributing to Employee Retirement Plans?

Business owners like you have two main benefits when it comes to contribution matching for your employees’ benefits. Of course, there are undoubtedly several others that you’ll discover as you continue to move forward with your employees’ retirement plan, but for this article, we’ll elaborate on:

  1. Employee Retention
  2. Tax Credits

Let’s dive into these a bit more, shall we?

Employee Retention

As we mentioned in a previous article on the top benefits of PEPs, one of the more apparent benefits of enrolling your employees in a retirement plan is to attract and retain talent. While having a retirement plan for your employees is attractive, you can up the ante by matching what they invest in their retirement plans.

Employees’ morale and dedication to the company will increase once they see that their workplaces are committed to them. After all, as an employee, wouldn’t you be excited to work at a place that you know looks after its employees?

Retention is a two-way street

If you choose to invest in your employees by matching or contributing to their retirement plans, that money is theirs to keep. That means, if your employee suddenly decides to leave your company for the business next door, your investment in them also goes out the door.

As an employer, you can be proactive about safeguarding your investments. Retention efforts include pushing for initiatives that create a positive work culture, such as regular 1:1s, performance reviews, continuous opportunities for learning, and others.

At the end of the day, it’ll make for a better employer-employee relationship and greater talent retention.

Tax Credits and Tax Breaks

We already covered how setting up retirement plans for your employees could give you tax credits and tax breaks, especially when setting up and administering the PEP to your employees.

To reiterate, setting up a PEP will get you up to $15,000 of tax breaks – where you’ll receive up to $5,000 per year for the first three years.

In addition, you can also claim other credits related to running the Pooled Employer Plan, such as auto-enrolment.

Contribution-Based Tax Savings

On top of those tax savings, did you know that you, as an employer, can also save on taxes through the contributions you make to your employees’ retirement plans? Here we’re going to explain how you can accumulate even more savings (for your business and your employees) depending on your contributions.

Deductible contributions

If you contribute to qualified retirement plans (like PEPs!), you can deduct the contributions to your taxable income. As long as you don’t exceed the limitations described in section 404 of the Internal Revenue Code, you can file these for tax deductions.

Employment tax savings

Employer contributions to employees’ 401k programs like Pooled Employer Plans are not subject to Social Security or Medicare taxes. This means that you can receive even more tax savings depending on the amount of contributions you choose to make towards your employees’ retirement benefits because these contributions are deductible in your taxable income.

It’s a win-win: you get to save more money in tax payments, and those savings go to your employees, who are responsible for keeping your business running like a well-oiled machine.

How Much Should I Match?

Now that you’re well aware of the benefits that retirement plans and contributions to those plans will bring to your company, you need to look at how much you’re going to be contributing.

Here at peppermint, we have two choices regarding contribution amount. These are Safe harbor and Non-safe harbor plan options.

Safe Harbor Option

A safe harbor plan includes a mandatory employer contribution match. This means that you’re required to contribute towards your employees’ retirement plans.

Suppose you don’t want to bog down your business with compliance testing and other regulatory requirements. In that case, the safe harbor option is for you, as you won’t be required to undergo annual compliance testing.

While the safe harbor plan gives you less freedom on contribution options, it does allow you to opt for higher contributions towards owners and highly compensated employees without testing failure, as all other employees are getting a good percentage of contributions from you. There are two different kinds of safe harbor options available, depending on the percentage you want to contribute.

The downside of this plan is that should your employee choose to leave your organization, they will get to keep 100% of their investment into their retirement plans. So this is only a good option if you intend to keep your turnover rates low.

 

Non-Safe Harbor Option

The non-safe harbor plan is a bit more flexible when it comes to the amount you want to contribute to your employees’ retirement plans. You can contribute as much or as little as you like.

This option may also give your employees more incentive to stay due to vesting schedules. You can create a vesting schedule to withhold a percentage of your employee’s earnings based on the duration of their employment. 

However, with great freedom comes responsibility, as the non-safe harbor plan involves more liabilities. This means that your business will be subject to calculations, testing, and applicable fees and may involve more risk, especially if legal issues arise between you and a former employee.

A Plan That Fits Your Business

The beauty of our plans and options here at peppermint is that you can pick the option and the contribution percentage that fits your business’ needs, budget, and requirements. We understand that retirement plans are a significant investment, and cookie-cutter plans simply won’t do.

Here at peppermint, we recommend our matching safe harbor plans first, simply because they’re the easiest to deal with. As a business owner, you’ll save more on tax payments because you contribute more, and you’re less likely to be bogged down with regulatory requirements and liabilities.

But of course, you know your business and employees best. So, our advisors are ready to help find the most suitable retirement program for you.

Email us now or schedule a call so that one of our specialists can help find the best pooled employer plan for you!

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