401(k) the Right Way: The HR Pro's Guide to Retirement Benefits

Did you know Americans collectively hold $6.9 trillion in 401(k) plans across the country? Retirement might seem like a distant dream, but time has a way of sneaking up on us—it’s important to take action now and secure your golden years.

401(k) plans are a powerful investment tool for employees, and many job seekers hunt for this benefit specifically when scanning job postings and deciding what to apply for. Offering this popular retirement plan is a win-win as employers also have a lot to gain with their recruitment and retention initiatives.

While it may feel too costly for some small and medium businesses to set up a 401(k) plan today, it’s a worthwhile investment in the long run to prevent top talent from getting away or leaving money on the table.

As employees, the sooner you start investing, the more time your money has to grow. But for employers, setting up 401(k) plans can be cumbersome with manual processes that slow your HR team down.

Plus, with BambooHR^® Benefits Administration, you can simplify connecting your people to their benefits and help your employees take control of their financial future.

What Is a 401(k)?

A 401(k) is an optional retirement savings plan offered by many employers. A portion of each paycheck is deducted, pre-tax, and deposited into several interest-accruing funds. This means participating employees don't pay taxes on their contributions until they withdraw from their 401(k).

As a hiring and retention tool, 401(k) accounts are a popular benefit because they allow employees to save for the future and enjoy financial independence in their retirement years. Plus, they can 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 matching contributions (each pay period, annually, etc.) also varies depending on your employer’s matching formula. Employees who don’t periodically contribute to their 401(k) or leave the company aren't eligible to receive 401(k) matching.

Although 401(k) matching isn't mandatory, participating employers leverage it as a recruiting tool to attract top candidates. It can also improve employee retention and engagement by motivating employees to contribute as much as they can to their 401(k), so they can receive the full match their employer offers.

Employers also reap the tax benefits; matching contributions are tax deductible and small businesses can receive tax credits for starting a new plan.

How Does a 401(k) Match Work?

According to the IRS, here are some steps a company needs to take to set up a 401(k) matching program for their employees:

• Decide on contributions. The percentage a business will contribute depends on the type of plan they opt into: traditional 401(k), safe harbor 401(k), automatic enrollment 401(k), and SIMPLE 401(k).
• Create a vesting schedule. Employees always have complete ownership of their own contributions. However, in traditional 401(k) plans, many companies design a gradual vesting schedule based on years of service for employer contributions.
• Consider investment options. Companies can allow employees to manage their investments themselves, or they can manage the funds on their employees’ behalf.
• Disclose the plan. The employer must provide a summary plan description (SPD) that informs employees of the structure plus their rights and responsibilities. The SPD gives employees a chance to decide if they want to participate in the plan or not.

The most common employer match is a partial 401(k) match—usually a 50% match on contributions up to 6% of the employee’s salary. Matching programs can vary depending on the company size and business sector.

What Are 401(k) Contributions?

A 401(k) contribution is a voluntary percentage, up to a specific limit, of an employee’s income that's automatically taken out of every paycheck and invested into their account. Employees can decide how to allocate their contributions among the investment choices their plan offers.

401(k) Contribution Limits 2023

Contribution limits change over time and will continue to gradually rise due to cost-of-living adjustments. The 401(k) contribution limit for 2023 is $22,500 (compared to $20,500 in 2022).

Since 401(k) contributions aren't taxed, the IRS sets contribution limits, so highly compensated employees can’t enjoy an unfair tax-saving advantage over other participants. It’s important to note that an employer match does not count toward the $22,500 401(k) limit.

401(k) Contribution Limits 2023 Over 50

Individuals aged 50 and over at the end of the calendar year can contribute an additional $7,500 to their 401(k) in 2023 (raising their total contribution limit to $30,000). These are called catch-up contributions to help make up for the years when they might not have been able to save enough.

Despite its name, eligible employees don’t have to be “behind” on their personal goals to take full advantage of catch-up contributions. Doing so can significantly boost their retirement funds, and they’ll stand to gain even more if their company offers an employer match.

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

401(k) Benefits for Employees

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

Plus, 401(k) savings grow tax-free as long as it stays in the account, allowing earnings to compound. While they will be taxed when account holders withdraw funds during retirement, they will likely be taxed at a lower rate compared to when they were fully employed.

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

Moreover, employees can enjoy the long-term growth advantage of a 401(k) even after they leave a company and no longer receive an employer match. They can choose to leave the account with their former employer, roll it over to their new employer’s plan, or roll it into an individual IRA. Cashing it out is also an option, but that’s generally advised against due to early withdrawal penalties.

How Does a 401(k) Benefit the Employer?

Like employees, employers can enjoy tax advantages by participating in a 401(k) plan. Employer matching contributions can 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 an impactful recruiting tool. If a candidate has to choose between similar offers, a 401(k) match could be the deciding factor as they consider the total compensation package.

What’s more, a vesting schedule could also improve retention since employees will be incentivized to stay longer in order to eventually have full ownership of their employer’s matching contributions.

Overall, employers who choose to invest in their workforce’s future can boost employee morale and engagement, leading to improved business outcomes.

Do I Have to Offer a 401(k) to All Employees?

The IRS has specific rules for who you can legally exclude. For example, you can make employees who are under the age of 21 or haven't completed a year of service ineligible for participation. However, you can’t exclude someone just because they’re older.

If you choose to offer a 401(k), you can automatically enroll employees and deduct elective deferrals from each paycheck unless the employee elects not to contribute or wishes to contribute a different amount.

You must provide employees with an initial notice that specifies the percentage that’ll be automatically deducted. Generally, employees have 90 days from the date of the first automatic contribution to withdraw if they choose.

How Do I Offer 401(k) to My Employees?

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

Everyone wins with a 401(k) plan—except maybe benefits managers using outdated processes. BambooHR Benefits Administration brings the whole benefits experience into one intuitive interface, to put headache-free solutions right at your fingertips.