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Mastering Retirement Benefits: The HR Pro's Guide to 401(k)

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Did you know that Americans hold a total of $6.9 trillion in 401(k) plans across the country? Retirement may seem like a distant dream, but time is creeping up on us - it's important to act now and secure your golden years.

401(k) plans are a powerful investment tool for employees, and many job seekers pay particular attention to this benefit when reviewing job postings and deciding what to apply for. Offering this popular retirement plan is a win-win, as employers also have much to gain in their recruitment and retention initiatives.

While it may prove too costly for some small and medium-sized businesses to set up a 401(k) plan today, it is a worthwhile investment in the long term to prevent top talent from leaving or leaving money on the table.

The earlier you start investing as an employee, the more time your money has to grow. However, for employers, setting up 401(k) plans can be tedious and require manual processes that slow down your HR team.

What is a 401(k)?

A 401(k) plan is an optional retirement savings plan offered by many employers. A portion of each paycheck is deducted pre-tax and deposited into various interest-earning funds. This means participating employees do not have to pay taxes on their contributions until they withdraw their 401(k).

As a tool for recruiting and retaining employees, 401(k) accounts are a popular benefit because they allow employees to save for the future and enjoy financial independence in retirement. They can also grow their savings even faster if their employer matches their contributions.

What is a 401(k) Match?

A 401(k) match is an additional contribution to your account made by your employer based on the amount you contribute, up to a certain percentage of your salary. The frequency of supplemental contributions (per pay period, annually, etc.) also depends on your employer's matching formula. Employees who do not contribute regularly to their 401(k) or leave the company are not eligible for 401(k) matching.

Although 401(k) matching is not mandatory, participating employers use it as a recruiting tool to attract top candidates. It can also improve employee retention and engagement by motivating them to contribute as much as possible to their 401(k) so they can receive their employer's full match.

Employers also benefit from tax benefits: Contributions are tax deductible, and small businesses can receive tax credits for setting up a new plan.

How does a 401(k) match work?

According to the IRS, a company must take the following steps to set up a 401(k) matching program for its employees:

  • Decide on contributions. The percentage a company contributes depends on the type of plan it has chosen: traditional 401(k), safe harbor 401(k), automatic enrollment 401(k), and SIMPLE 401(k).
  • Create a vesting plan. Employees always own their own contributions. However, with traditional 401(k) plans, many companies create a phased vesting plan for employer contributions based on the number of years of service.
  • Consider the investment options. Companies can allow their employees to manage their investments themselves, or they can manage the funds on behalf of their employees.
  • Disclose the plan. The employer must provide a Summary Plan Description (SPD) informing employees of the structure and their rights and responsibilities. The SPD gives employees the opportunity to decide whether they want to participate in the plan or not.

The most common employer match is a partial 401(k) match - typically a match of 50% of contributions up to 6% of the employee's salary. Matching programs can vary depending on the size of the company and the industry.

What are 401(k) contributions?

A 401(k) contribution is a voluntary percentage of an employee's income that is automatically deducted from each paycheck and deposited into the account, up to a certain limit. Employees can decide how they want to allocate their contributions among the investment options offered by their plan.

2023 401(k) Contribution Limits

The contribution assessment limits change over time and will continue to increase gradually due to adjustments to the cost of living. The 401(k) contribution limit for 2023 is $22,500 (up from $20,500 in 2022).

Because 401(k) contributions are not taxed, the IRS sets contribution limits so that highly paid employees do not enjoy an unfair tax advantage over other participants. It's important to note that an employer match does not count toward the $22,500 limit for 401(k) contributions.

2023 401(k) contribution limits over 50

Individuals who are 50 and older at the end of the calendar year can contribute an additional $7,500 to their 401(k) in 2023 (bringing their total contribution limit to $30,000). These contributions are called "catch-up contributions" and are intended to help make up for the years in which you didn't save enough.

Despite the name, eligible employees do not have to be behind on their personal goals to take full advantage of the catch-up contributions. This way they can significantly boost their retirement funds, and they can benefit even more if their company offers an employer match.

When deciding how much to contribute, a 401(k) calculator can help you see the long-term impact of catch-up contributions on your retirement nest egg.

401(k) benefits for employees

Tax-deferred 401(k) plans are beneficial for employees because a portion of their salary is set aside before federal and state income taxes are withheld, meaning they pay less income tax now.

Additionally, 401(k) savings grow tax-free as long as they remain in the account, allowing returns to compound. When account holders withdraw the money in retirement, they will be taxed, but likely at a lower rate than when they were fully employed.

If an employer offers a 401(k), employees should do their best to take full advantage of it and maximize their retirement savings. A 401(k) match is commonly referred to as "free money" because the company contributes up to a certain percentage of salary.

Additionally, employees can continue to enjoy the long-term growth benefits of a 401(k) even if they leave a company and no longer receive an employer match. You have the choice to leave the account with your former employer, roll it over to your new employer's plan, or roll it over into an individual IRA. Withdrawal is also possible, but this is generally discouraged due to early withdrawal penalties.

How does a 401(k) plan benefit the employer?

Like employees, employers can also benefit from tax advantages when they participate in a 401(k) plan. The employer's matching contributions may be deducted from the company's taxable income as long as they are within the contribution limit set by the IRS.

Offering a 401(k) plan is also a powerful recruiting tool. If a candidate has to choose between similar offers, a 401(k) match could be the deciding factor when considering the entire compensation package.

Additionally, a vesting plan could also improve employee retention by incentivizing employees to stay longer in order to eventually receive the full benefits of their employer's matching contributions.

Overall, employers who invest in the future of their workforce can increase employee morale and engagement, which in turn leads to better business results.

Do I have to offer a 401(k) to all employees?

The tax office has specific rules about who you can legally exclude. For example, you can exclude employees who are under 21 years old or who have not yet completed a year of service from participating. However, you cannot exclude someone just because they are older.

If you choose a 401(k) program, you can automatically enroll your employees and deduct contributions from each paycheck unless the employee chooses not to contribute or chooses a different amount.

You must provide your employees with an initial notice indicating the percentage that will be automatically deducted. Typically, employees have 90 days from the date of the first automatic contribution to withdraw the contribution if they wish.

How can I offer 401(k) to my employees?

401(k) plans are a smart investment for employers and employees alike. You'll be better able to attract and retain top talent, and your employees will feel valued and motivated to save for their retirement.

With a 401(k) plan, everyone wins - except perhaps benefits managers who use outdated processes. IceHrm Benefits Administration brings together all benefits administration into one intuitive interface to give you headache-free solutions.

IceHrm Benefits Administration streamlines 401(k) management, ensuring smooth operations and maximizing employee satisfaction.

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