If you work for a company, you might be offered a 401(k) plan. For millions of Americans, 401(k) plans may play a critical role in saving for retirement. Participating in a 401(k) plan involves putting aside tax-deferred chunks of every paycheck, which, in theory, may compound over time.
In addition to setting aside some of your own money, many employers offer matching programs in which they contribute to your 401(k) on your behalf. For example, a company might offer a 50 percent match on up to 6 percent’s worth of contributions—meaning that if you put in 6 percent of your paycheck, the company matches that by contributing 3 percent out of its own pocket.
If you’re employed by a company that offers a 401(k) matching program, you should consider taking advantage of it. Otherwise, you may be leaving money on the table. With all this in mind, let’s take a look at four interesting facts you need to know about 401(k) employer contributions.
1. The average employer 401(k) match is at an all-time high.
According to Fidelity, the average 401(k) match was 4.7 percent in 2019—which was the highest number ever recorded.
This finding has two implications. One, if you’re an employee, it’s all the more reason to maximize your contributions to your 401(k) program. And two, if you’re an employer that either doesn’t offer a 401(k) plan or doesn’t match employee contributions in a similar fashion, it may be time to rethink your approach. Otherwise, it could be difficult to attract and retain top talent.
2. Half of employers with 401(k) programs don’t match.
One recent report found that 56 percent of employers offer 401(k) plans, but only 49 percent of those companies offer matching programs.
On one hand, if you’re an employee who’s fortunate enough to work for an organization that offers a generous matching program, you should count your blessings. On the other hand, if your employer doesn’t offer a matching program, you can take comfort in the fact that, at the very least, you have the opportunity to contribute to a program—and there are many people who aren’t so lucky.
Similar to the previous point, employers that do offer matching programs can differentiate their benefits packages from the competition, making their organization more attractive to job seekers.
3. If you just started a new job, you may be able to take advantage of matching right away.
A recent Investopedia article revealed that 62 percent of employees are able to contribute to their 401(k) plans right away. At other companies, employees might have to wait a certain amount of time (e.g., one year) before being able to take advantage of the program.
A word to the wise: Just because your employer might offer a 401(k) matching program doesn’t mean you can avoid reading the fine print. Some organizations might tack on certain stipulations to their matching program. For example, you need to be an employee for at least three years to keep employer contributions after you leave.
4. If you’re a small-business owner, you need to make sure your plan passes testing.
Whether you own a company or are simply curious, 401(k) plans need to pass two specific tests in order to comply with regulations:
- Average contribution percentage (ACP)
- Average deferral percentage (ADP)
Per the ACP test, employers and highly compensated employees (i.e., people earning more than $120,000 or owning more than 5 percent of the organization) can’t make up more than 60 percent of the assets in the plan. This is why many employers offer safe harbor contributions—or matching programs that ensure they remain compliant.
Per the ADP test, the ADP of highly compensated employees can’t be more than 2 percentage points greater than the ADP of non-highly compensated employees. If your plan fails either test, the IRS offers guidance on how you can rectify the situation.
Do you need help with your 401(k) plan?
When it comes to the world of 401(k) plans, there’s a lot to consider. For example, if you’re an employee who’s contributed to a 401(k) plan throughout your career and you leave your job or retire, you might want to roll it over into an IRA. If you time it correctly, you may be able to achieve some tax benefits, allowing you to achieve more control over how your funds are allocated.
And if you’re an employer, you may be thinking about offering your employees an inaugural 401(k) plan—or trying to optimize an existing one. In either scenario, figuring out the best path forward is tricky, particularly because tax laws and other financial regulations change on a regular basis.
The good news is that you don’t have to figure all of this out on your own. EP Wealth can help. Schedule a consultation today to find out what you can do to increase the chances that you secure a healthy financial future for yourself or your team.
We look forward to hearing from you!
DISCLOSURES:
- A Defined Contribution 401(k) plan is a complex retirement savings vehicle that is subject to regulations under the Internal Revenue Service (“IRS”), Department of Labor (“DOL”) and The Employee Retirement Income Security Act (“ERISA”). ERISA and other governing regulations may prohibit the use of some plans and/or the exclusion of employees from retirement benefits. Please consult with a Retirement Plan Administrator or ERISA attorney prior to enacting anything referenced here. Other alternatives may exists that may prove to be more beneficial or better suited for your individual needs of your company. The information presented was obtained from sources deemed to be reliable. However, we cannot guarantee the accuracy or completeness of the information offered. All expressions of opinion are subject to change without notice.
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