The *company* economics of a 401k match

Hi all. We know that we should do all we can to get as much as we can of a company matching contribution to a 401k. Can anyone describe the benefit to, or discount to the company for it's contribution? I am quite sure a company bottom-line isn't lowered dollar-for-dollar. I know of billion-dollar companies with differing matching amounts and programs, and I wonder why. thanks, Joe Weinstein

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Reply to
joe.weinstein
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Well, different companies offer other benefits and perqs to employees, as well; depending on where you go, you might find an employee stock purchase program, tuition reimbursement, a whole set of health plans to choose from, paid sabbatical leave, on-site gym or reimbursement for joining one, etc. Presumably they offer this stuff because they think it'll help them attract and retain good employees, or make employees happier and more effective on the job.

When I worked at a Large Chip Manufacturer, they didn't match 401k at all, but instead preferred to make a variable contribution into a profit-sharing plan that vested over time. The actual amount of money was quite generous, but as an employee you had to accept that (a) you wouldn't know how much you were getting in advance and (b) you had to stick around for N years before the money was actually yours. From the company's point of view, (a) allowed them to cut back in lean times, and (b) encouraged employee retention.

My current employer offers a straightforward fixed match on the first

5% of your salary with no vesting period, which I think is probably more typical. It's a small company, management who set up the plan is as interested in deferring part of their compensation and saving for retirement as we peon employees, and I think it's seen as a fixed cost of hiring good people.

-Sandra the cynic

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Reply to
Sandra Loosemore

It's just another form of employee compensation, I don't see why the company wouldn't deduct it as a business expense. Why are you "quite sure" otherwise? As to why companies don't all offer exactly the same match, it's just part of their overall competitive strategy in the labor market. Matching might also be a factor in meeting the rules for highly-compensated employees (HCE's) vs. rank-and-file when it comes to taxation of qualified retirement plans, but I'd have to research that to be sure.

The main benefit to the company of 401k-match vs. straight pay is, it removes some compensation from "base pay". So many things are tied to base pay -- group term life insurance, unemployment, severance, pension, vacation/sick pay, bonuses -- that anything the company can do to move dollars out of base pay in favor of "supplemental" compensation such as

401k matching or group health insurance is a plus for the company and a minus for the employee.

It's just another form of bundling. Almost anytime something is bundled, it's usually better for the seller and worse for the consumer (because it makes it harder for the consumer to comparison-shop).

-Mark Bole

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Reply to
Mark Bole

Thanks, I do understand the retention motivation etc, but I am asking whether a company match is in fact simple hard cash debited immediately from the corporate coffers, or whether there is any tax preference, interest-bearing deferment account, or other money-denominated compensation available to the company that lowers the actual cost to the company. Joe Weinstein

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Reply to
joe.weinstein

As most have stated, it's a benefit. It's treated as pay to the employee as far as the accountants are concerned. (Of course, for companies that 'vest' the matching over 5 years or so, the accounting may be slightly different.)

Part of the benefit is this - If there were no matching, and participation were low among the common folk, the plan would be deemed 'top heavy' and the higher ups would have limits lower than the current

15.5/20.5K deposit limits. The match attracts a higher participation level and reduces that risk of imbalance. Joe

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Reply to
joetaxpayer

This is an obscure example, but there are benefits when employer stock is used as the match in a 401k plan. It's a technical area to weed through, has to do with both corporate tax and "nondiscrimination testing" of 401k plans...if interested google: ESOP KSOP MATCH TAX

-Tad

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Reply to
Tad Borek

I meant to mention in my earlier post, there is also an "immediate and free" up-front benefit to the company, in that while the employee's contributions are subject to payroll tax (7.65% FICA), the employer's match is not. So if I'm an employer, I'm way ahead by getting my employees to defer some of their compensation and accept a matching contribution, in lieu of up-front pay, which would cost the employer its normal share of payroll tax.

Also, I would place much more emphasis on Tad's comment: companies can potentially make out like bandits (literally) when the company match is offered in the form of stock instead of cash. In addition to the search terms Tad suggested, try "401(k) corporate fiduciary lawsuit". Even in the aftermath of Enron, these types of matching contributions are far from being solely in the interest of plan participants.

-Mark Bole

Reply to
Mark Bole

Well the minimum goal of most profit-seeking companies is to break even. That is, they have at least enough net revenue to pay all expenses (including salaries, capital improvements, etc...). Given that, the underlying business rule is that for every $1 spent, the company gets at least $1 back (net). As I think you understand, employee retention is just an extension of this. By keeping employees happy, productivity rises and HR costs fall. So economically, it actually improves a company's "bottom line" to pay its employees competitive rates. The real question is "which method of payment is best (match or otherwise, in this case)."

Tax-wise: The match is a business expense by which the company reduces its overall taxes. The company also avoids its share of FICA by contributing to a qualified plan instead of direct pay. Furthermore, HCE's can generally contribute more as the non-HCEs contribute more. Therefore, the match is a motivator for the non-HCE to participate in the 401k so that the big wigs can participate in the 401k which reduces their personal income taxes.

Another unseen benefit is that the company match is often an illusion of pay that some will never really receive. Employees look at company match dollars as part of their pay, but don't consider that it could be taken away from them in the future (vesting schedules). That isn't the case with upfront wages.

As for the "interest bearing deferment..." the simple answer is "no". A qualified plan is a trust entity that is setup and run independent of the company. The company cannot use funds in the trust for their benefit (that is a HUGE no-no). The only exception is that many companies do not credit the company match until the end of the month, so I suspect the match from the pay-periods in the middle of the month were likely in a company owned sweep account until that time.

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Reply to
kastnna

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