Hear Ye Hear Ye, 401(k) Matching Isn't Required - And It Can Be 100% Tax Deductible

By Stuart Robertson

There are several big myths around employer contributions in 401(k) plans. Often referred to as a 401(k) match, or matching contribution, many small businesses don’t look into starting a 401(k) as it’s common to believe a match is required. If you believe that, you might think 401(k) plans are expensive. In reality, a match is not required to offer 401(k) benefits. and even better news, if you do decide to offer a match, it is tax deductible for your firm. Given tax deductions, matching doesn’t end up being expensive to do; however, it is a cash flow consideration.

Can We Really Deduct All Our Company 401(k) Contributions?

Your business will typically be able to deduct nearly all of matching 401(k) contributions. Under current 2019 tax laws, the deduction for contributions to a 401(k) must not exceed 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan.

So, if an employee makes $60,000 per year, you could make a match or other employer 401(k) contribution up to 25% of her salary (or $15,000 in this example), and it is 100% tax deductible for your business. Given most employers commonly match in the 3% to 5% of salary range, most are able to deduct 100% of contributions.

Some businesses will need to keep an eye on big-time earners. In 2019, the maximum compensation that can be taken into account for each employee’s contributions is $280,000 (rising to $285,000 in 2020). And, the most an employer can contribute and receive into their 401(k) account for the year is $56,000 (if under 50 years of age, moving to $57,000 in 2020). Yes, there could be a chance that 100% of some employer contributions won’t be deductible for a business. Yet, in most cases it will or can be easily managed so it is.

To Match or Not to Match

It’s good to know matching in a 401(k) is tax deductible for your business and that is not even required. Well, you might still be wondering why do businesses choose to match or not match? From our experience, most small businesses do choose to offer a match for two core reasons:

  1. They want to offer a program to help keep their valuable employees for the long-term and attract great employees too.
  2. Owners and highly compensated employees can sometimes be restricted from fully participating in the plan without a match and that’s not a great experience. In fact, many businesses select the Safe Harbor 401(k) plan design to ensure that all employees including owners can fully participate in the plan and of course receive the full match.

There are some good reasons not to offer a match. Some businesses are just starting out and have a heightened need to watch cash flow. Others run highly seasonal businesses making it more difficult to provide a regular payroll match.

Know that employees still value the ease and high contribution limits of a 401(k) even if matching doesn’t make sense for your business. If matching doesn’t work for your business, you may want to consider the profit share feature of the 401(k). Annually, you can determine how the business performed and provide a profit share in good years and not or on a limited basis in down years. And yes, the profit share into a 401(k) is tax deductible too.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.