Maximizing Returns: Exploring the Employer Benefits of 401(k) Plans
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- 81% of employees say a retirement fund is extremely important and that they will actively seek a role with this benefit.
- Introducing a 401(k) plan can have far-reaching benefits for employers, including lower turnover and higher workforce morale.
- By understanding these advantages, companies can plan and implement HR strategies more effectively.
Offering a comprehensive benefits package is crucial to business success. With the right perks, you can support employees to do their best work and earn their loyalty.
Retirement plans are an integral part of your benefits administration strategy. They don’t just provide employees with financial security but also bring your company tax advantages. When you offer a generous plan, you can also boost employee morale and improve performance.
401(k) savings accounts are a popular benefit among US businesses. However, you may wonder whether they’re a worthwhile investment or if you should consider other options. Here’s a look at the employer benefits of 401(k) plans and how to ensure they have a long-term positive effect on your organization.
Disclaimer: This content is for informational purposes only and should not be considered legal or tax advice. Please consult with professionals for guidance.
The basics of 401(k) plans
401(k) plans are the most popular way for American employees to build retirement savings. These employer-sponsored programs allow participants to invest a portion of their salary either before or after taxes, depending on the type of plan.
US businesses usually have the option to match a percentage of their team’s contributions. As 401(k) plans are a form of indirect compensation, employees gain ownership of company contributions over time in what’s called ‘vesting’.
All 401(k) plans are qualified, which means they meet the Internal Revenue Service’s (IRS) requirements. Under these guidelines, plan administrators must:
- Define the terms: Plans should state who’s eligible, the contribution amounts, and the payment schedule
- Meet annual contribution limits: Total annual contributions from an employer cannot exceed 100% of an employee’s compensation or $66,000 (USD), whichever comes first
- Follow the IRS vesting schedule: Companies must cede ownership over their contributions within a specific timeframe
- Comply with anti-discrimination rules: Plans for managers, owners, or highly compensated employees need to pass the IRS’s nondiscrimination tests
- Allow eligible employees to participate: According to the Department of Labor (DOL), some plans may require employees to be at least 21 years old and have a year of service with the company
- Limit deferrals: Although plan participants can make catch-up contributions, they can’t exceed $22,500 (or $15,500 for SIMPLE plans)
Companies can’t mix retirement accounts with their own assets under the federal Employee Retirement Income Security Act (ERISA). Keeping funds separate means savings accounts are secure if businesses close or merge with larger organizations.
Retirement plans are subject to federal laws, but there can be differences in state regulations. For example, New York allows retirees to exempt up to $20,000 of their annual withdrawals. Check our US payroll tax guide for more information on benefits administration in specific states.
Types of 401(k) plans
There are four types of plans with distinct rules and features. Some are tax-deferred, which means you allocate funds before withholding. Others regulate how employers match or vest contributions. Here’s a quick comparison:
Timing of employee contributions
Employer matching contributions
Minimum time for employee vesting
|Most common type of 401(k) plan
Optional (but contributions go to a separate account)
|Withdrawals are tax-free
Choice of pre or post-tax
(Matching by up to 4% of employee salary or a guaranteed 3% of each paycheck)
|No anti-discrimination tests
Tax-free withdrawals for post-tax contributions
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)
(Matching by up to 4% of employee salary or a guaranteed 2% of each paycheck)
|Only eligible for businesses with 100 or fewer employees
For a deeper look at each plan, you can browse the IRS guidelines on 401(k) plans.
Note that 401(k) contributions are either taxed when you deduct them from the employee’s paycheck or upon withdrawal, depending on the type of plan. In both cases, the taxed amount is subject to the standard US income tax rate.
Companies can offer more than one 401(k) plan. For instance, many companies have both standard and Roth plans so employees can choose a tax structure that suits them. Employees can also participate in multiple 401(k)s provided they meet the eligibility criteria.
Employer benefits of 401(k) plans
From cost savings to a strong company culture, implementing a 401(k) plan can have a positive impact on almost every part of your business. Here’s a closer look at what you can expect:
Attracting and retaining talent
A competitive 401(k) could help you attract top talent and increase retention by enhancing job satisfaction.
81% of employees say a retirement fund is extremely important and that they will actively seek a role with this benefit. If you offer a generous plan, you could outshine competitors with this perk. Mention your 401(k) plan through the recruitment process to ensure job seekers are aware of it.
Once they’re at your company, employees will be less tempted to look elsewhere if they have a lucrative retirement plan. In fact, 23% of executives said insufficient benefits were the primary reason for resignations at their company.
Regularly collect feedback to ensure 401(k) packages are meeting employee needs. Some popular methods are:
- Company-wide surveys
- Needs analysis based on demographic data
- Input from employee resource groups (ERGs)
- Meetings with focus groups
Building a strong company brand
Besides appealing to potential candidates, a retirement savings plan can also demonstrate to the wider world that you’re an employee-centered business. Other parties—such as customers, clients, and partners—may be more excited to associate with your organization.
For instance, media company Comcast is well known for its generous 401(k) plans. It offers automatic enrollment with dollar-for-dollar matching up to the IRS limit on the first pay.
Analyzing public perception through surveys or market research can help gauge public sentiment about your company. If your business is too small to have established a media following, you could instead monitor feedback and reactions to social media posts about retirement benefits.
Tax advantages for employers
401(k) plans come with tax benefits that can save your organization costs and improve your bottom line. There are three main advantages:
- Tax-deductible contributions: If you match your employee’s contributions, you can deduct these expenses from your taxable income
- Payroll tax savings: Since contributions are pre-tax, you calculate payroll taxes on a lower gross amount leading to savings for both you and employees
- Tax credits: Some small businesses and startups are eligible for credits to offset the cost of setting up retirement plans
Consulting with financial advisors can help you find the best retirement plans to maximize tax advantages while remaining compliant. For example, Deel provides businesses with ongoing guidance about running US payroll, including benefits administration and compliance management.
Matthew Buchanan, Co-founder, Letterboxd
Boosting employee morale
Psychological studies show a strong correlation between compensation and job satisfaction. By providing your team with a generous benefits package, you can help them feel seen and valued by the company, improving overall morale.
Here’s how to maximize the impact of your 401(k) on employee morale:
- Automatic enrollment: Adding employees to retirement plans during the onboarding process increases awareness and participation rates
- Employer matching: Making higher contributions can result in having more content and engaged employees who stay with the company longer
- Immediate contributions: Matching from day one ensures that even new hires feel valued by the company
- Immediate vesting: Some businesses only vest after a set time in case employees leave. When you give teams ownership of employer contributions from the first payment, you not only reward them but show your trust in them
Monitoring participation rates and contribution amounts can help you see whether employees are making the most of their 401(k)s. You can also compare the data with engagement levels from surveys to see whether your current plans are having the desired impact on morale.
Improving employee mental health
Helping your team members become financially secure can protect their mental health. When studies looked into the causes of poor mental health, 48% of people reported financial concerns and 71% were worried about outliving their retirement funds.
To alleviate financial stress, make sure employees understand the use and advantages of their 401(k) plan. Share comprehensive information during onboarding, offer ongoing support, and give advance notice about any changes to their benefits administration, for example, during a PEO transition or a merger.
Fostering a culture of savings
Promoting financial health in the workplace encourages employees to save for their future. When teams are secure, they can make decisions based on career goals and personal growth rather than financial pressures. For example, they can prioritize professional development over finding a second job.
Consider conducting financial wellness programs and workshops to foster awareness. These training sessions can give teams insights into which 401(k) package is best for them and how to make long-term plans with those savings.
Alongside this strategy, you can give teams more control over their finances with a choice of benefits, customizable plans, and on-demand pay. You’ll empower them to choose the savings types and schedules that suit them best.
Making benefits administration simple and accessible gives employees better oversight over their retirement plans. That’s why Deel offers a centralized solution where teams from anywhere in the world can log in and view their payroll, contract, and benefits information. Even if you’re based in another country, you and your US employees can easily manage 401(k) plans via the platform.
Software company Strada uses Deel to run payroll and manage benefits in the US. Amir Prodensky, the co-founder and CEO said, “It was important for us to find a partner that had experience in these HR processes and that offered a seamless experience not only for us but also for our employees.”
Risk management for employers
While 401(k) plans have many advantages, some companies are deterred by the risks, as retirement plans are complex and the regulations may change.
If you don’t stay up to date, you could unknowingly violate ERISA guidelines and face a penalty from the DOL or IRS. You could also harm your reputation if the situation becomes public knowledge. For instance, there is extensive media coverage about General Electric’s $61 million mismanagement suit.
If you’re based outside the US, arranging 401(k) plans for your US division can be especially challenging, as you may not have the familiarity or the oversight to effectively set up retirement plans abroad. To mitigate the risks, consider a solution like Deel’s PEO* or US Payroll.
Charlie Ross, Chief Operating Officer, Cake
See how Deel can help
Providing a 401(k) plan has numerous benefits for companies, including improving financial health and promoting a positive work culture. By offering a robust retirement package, you can retain your top talent for years to come.
Deel’s centralized solution lets you manage retirement packages for remote teams all over the US and beyond, with expert insights to bring you the best benefits, payroll experiences, and compliance support.
Book a 30-minute platform demo to learn more.
*Provided by Deel PEO US, LLC, Deel Employment Services, LLC, or through Deel's partnership with licensed providers where required.