Tips for Starting a Company Matching Contribution
A company match is a fantastic thing to offer your employees in a defined contribution (like 401k or 403b) plan. There are numerous studies that have shown that participation increases significantly when a match is offered, which will eventually turn into more people getting on the right track to be able to retire someday.
One problem that many businesses face is the financial aspect. What if EVERYONE takes advantage of the match? How many people will actually contribute to the threshold? How do matching contributions tie up future dollars that we'd rather spend on infrastructure or acquisition? These are some of the most common questions we hear during match discussions.
Now questions for the business: Should this match or profit sharing contribution be considered discretionary and something to be decided on at the end of the year? Do you struggle with participation rates? Bottom line: how much can the company afford?
When determining whether to match, start by examining your total payroll for eligible employees and see what the company can afford. For example, can the business afford to contribute 3% of total payroll? It's unlikely that every employee will participate to get the full match amount, but it's important to establish the worst-case scenario by setting the limit of what the company could afford. Find the comfortable dollar amount as a percentage of payroll.
Second, consider cash flow. When should the match go in? Consider matching per payroll. That way there isn't a true-up at the end of the year where you have to go back and contribute more to cover when participants varied their contribution rate more or less than the match, and it helps control short term cash-flow better. Or, should this be more of a profit sharing scenario where the business needs to see how much is leftover at year end?
Third, what's the effect you need for testing purposes? If you can afford a safe harbor contribution (either 3% of payroll for all eligible employees, or a match of either 100% of the first 3% of pay and 50% of the next 2% of pay or 100% of the first 4%) go for it. You'll get an automatic pass for testing. If you can't afford that, consider a match that helps encourage participants to put in a higher contribution rate. (Go back to step one where you determined how much the business could afford.) In the book "Save More For Tomorrow," they show several illustrations like matching 10% up to 10% of pay (which amounts to 1% of total payroll). You could do 25% up to 6% (1.5% of total payroll). Whatever you choose, try to encourage folks to save more. As a nation, most people have under-saved for retirement. Do consider your employee base, their behavior, and their pay structure when you put together the formula.
In conclusion, there are a number of ways to get creative on a company match. This article is the tip of the iceberg. The two most important things a company should consider are how much they can afford in matching dollars and whether they want to commit ongoing to a safe harbor set up. After that, it's important to work with your consultant/advisor and your TPA to get the right fit for your company and employees.