Understanding Employer Contributions to 401(k) Plans

As an added benefit, many small businesses choose to offer an employee retirement plan, such as a payroll deduction IRA, a SIMPLE (Savings Incentive Match for Employees) IRA or a traditional 401(k) plan to their employees. While there is no law requiring companies to contribute to the retirement plan (with the exception of Simple IRA and SEP IRA plans), many employers do choose to make contributions because it’s an effective tool for hiring and keeping top-quality employees. Also, businesses receive a tax benefit for contributing to employees’ 401(k) accounts.

The Payroll Department sees a wide variety of company match choices that are available for 401(k) plans, depending on the type of plan you’re offering. Some common matching options include:

  • Making a dollar-for-dollar (100%) match on employee contributions up to a fixed percentage of the employees’ salary.
  • Matching a percentage of the pay the employee contributions into the 401(k) account.
  • Making a set contribution, such as 2%, to all employees, regardless of whether they make contributions into the 401(k) or not.

Many employers impose certain conditions before the employer begins matching employee contributions to 401(k) plans. Employees may need to meet a specified period of eligibility, such as six months or a year of employment, before they’re eligible for a 401(k) match.

Each year, the employer decides what type of contribution they’ll make, if any, and when they’ll make it. For example, you may opt to deposit matching contributions each payroll period, each quarter or once a year. Generally, most companies will wait to deposit funds until they close out their business year (either fiscal or calendar). This enables businesses to use the funds during the year and determine their profits, expenses and taxes for the year.

However, per Internal Revenue Code, the latest deadline in which employer matching contributions must be deposited is the due date (including extensions) for filing your company’s Federal income tax return for the year. If you’re a tax-exempt organization, then you generally have to the 15th day of the 10th month following the close your organization’s tax year. If your company does not make your contributions on a timely basis, your business may be penalized.

Managing a company’s retirement plan can be challenging for small business owners. The Payroll Department, a payroll service provider in Brownsburg, can help keep your plan running smoothly by handling your retirement plan deductions and contribution submissions. So, you can focus on more important things in running and building your business.

-Ariane of The Payroll Department Blog Team

Posted in: Operating a Small Business, Payroll, Payroll Processing, Retirement plans

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