Despite the circumstances surrounding the financial impact COVID-19 has taken on businesses, families, and individuals across the globe, retirement is still an integral benefit that employees seek. In a time where employees are exploring their options, employees may be wondering how much they have in retirement savings, or how much they will need to contribute each paycheck to retire comfortably. Some employees may not have thought about retirement at all. “I have time,” is a common thought for postponing retirement planning. Regardless of where your employees may stand on retirement preparation, be proactive and revamp or revise your retirement options to help your employees start saving now.
Investing in a 401(k) provides employers with tax breaks from the IRS. Employer contributions to employees’ 401(k) plans are tax-free income, which lowers employers’ federal taxable income. Employer contributions can be deducted on the employer’s federal income tax, so long as the amount does not exceed the limits as outlined in the Internal Revenue Code (Section 404). For more information on deduction limitations for employers, please reference Publication 560.
There are limitations for employer contributions, which is based on employee contributions and compensation. The total employer and employee 401(k) contribution limit for 2021 is $58,000. For those employees age 50 or older, the limit is $64,500, including the catch-up amount. If you plan on contributing to your employees’ 401(k) plans, it is critical that you prepare ahead of time by analyzing your overall contributions. Exceeding the 2021 contributions can result in a 6% tax per year you exceed the limits.
Another limit consideration are the highly compensated employees who do not face as many contribution limits as non-highly compensated employees. The IRS utilizes an actual deferral percentage test to level-out 401(k) contribution participation across employees of various pay grades.
About half of companies match their employees tax contributions. Just as you are not required to provide 401(k) or other retirement options to your employees, you are also not required to provide matching contributions. However, there are many benefits to matching employee 401(k) contributions. If you decide to match your employees’ 401(k) contributions, you have the option to contribute a percentage of matching or a percentage of their annual income. For example, you can choose to match every $0.50 per $1.00 that an employee contributes. Or you might elect to contribute an overall 5% of their annual income. Three percent (3%) is the average company-matching contribution.
It is important to understand that future and current employees will be looking for employers that will also contribute to their retirement fund. Think of matching 401(k) contributions as an added benefit of your company’s overall appeal. Don’t promise things that you will not be able to provide but also try to keep up with competitors. If you choose not to match your employees’ 401(k) contributions, it may limit recruiting efforts and lower employee retention value.
Making decisions regarding your 401(k) plan options may seem like a low priority item as it’s difficult to save money when many businesses and individuals are struggling to make ends meet. Think of your employees’ 401(k) benefits as an investment into your business’s future. Human Capital can help make your decisions around retirement easier by providing you with up-to-date, flexible options for your 401(k) plan. Contact Human Capital to get started and let us improve your business model and help plan for your future today.