Employer Matching Contributions: A Benefit That Goes Two Ways
Offering employer-matching contributions is one of the most attractive benefits an employer can offer their workforce. Beyond the obvious financial advantages for employees, offering a matching contribution as an employer has significant financial and strategic advantages.
In this article, we’ll explore the compelling reasons for offering employer-matching contributions, how employer-matching contributions work, and their associated limits. By the end of this post, you’ll see why employer-matching contributions are a win-win for employers and employees alike!
Why Offer Employer Contributions to Retirement Plans?
Offering matching contributions isn't just about helping employees save for retirement. It’s a strategic move with big advantages for employers.
ENJOY EMPLOYER & EMPLOYEE TAX BENEFITS WITH MATCHING CONTRIBUTIONS
Matching contributions are tax-deductible for employers, reducing their taxable income. For employees, these contributions grow tax-free in retirement accounts until withdrawal. This dual benefit—tax savings for employers and tax-deferred growth for employees—makes employer matches a highly efficient use of resources.
For small businesses, matching contributions also allow owners to save more for their own retirement while taking advantage of tax deductions. Plans like SEP IRAs and SIMPLE IRAs are especially attractive for small businesses because they’re easy to administer and have lower operating costs than traditional 401(k) plans.
The SECURE Act 2.0 has made employer-matching contributions even more attractive. Among its provisions, the Act allows employers to make matching contributions to Roth 401(k) accounts, meaning employees can enjoy tax-free growth and withdrawals. Additionally, small businesses may be eligible for tax credits to offset the costs of setting up retirement plans, making it easier than ever to offer these benefits.
The Act also includes provisions encouraging small businesses to participate in pooled employer plans (PEPs), which can lower administrative costs. By taking advantage of these incentives, small businesses can offer competitive retirement benefits without breaking the bank.
ATTRACT & RETAIN EMPLOYEES WITH AN EMPLOYER MATCH
Offering matching contributions can demonstrate a company’s commitment to employee well-being, thereby increasing loyalty and reducing employee turnover.
When employers offer matching contributions, retirement plan participation rates soar. It’s a great incentive to prompt employees to contribute, leading them to better retirement readiness. This can significantly boost morale, as employees feel valued and supported.
Not to mention, employer contributions are a standard benefit among most employers that offer retirement plans. Failing to offer them can put your business at a disadvantage. According to the Plan Sponsor Council of America, nearly 98% of employers with a 401(k) plan offer some form of match. To attract and retain top talent, especially in industries with fierce competition for skilled workers, providing this benefit is critical.
SIMPLIFY & CUSTOMIZE YOUR EMPLOYER MATCH
Employer contributions make it easier to follow retirement plan rules. Offering matches and encouraging employee participation can help with 401(k) compliance requirements.
Additionally, small businesses can leverage SIMPLE IRAs or SEP IRAs to offer matching contributions without the administrative complexity of a traditional 401(k). These plans provide flexibility while still positioning the business as a competitive employer.
The vesting schedule is at an employer’s discretion, and employers offering SEPs or SIMPLE IRAs may choose contribution amounts that fit their requirements.
For more information, consult the IRS publication 560, “Retirement Plans for Small Business.”
How Do Employer Matching Contributions Work?
Matching contributions are additional funds employers contribute to employees’ retirement accounts, such as 401(k)s, SIMPLE IRAs, or SEP IRAs. These contributions are often proportional to the amount employees contribute themselves, up to a specific limit. For example, an employer might offer a 100% match for the first 3% of an employee’s salary or a 50% match for contributions up to 6%.
2025 CONTRIBUTION LIMITS
The 401(k) employee contribution limit is $23,500 for employees under 50. Combined employee and employer contributions cannot exceed $70,000.
For SIMPLE IRAs, the total annual limit, including employer-matching contributions, is $16,500 for employees under 50.
SEP IRAs allow employers to contribute up to 25% of an employee’s compensation, capped at $70,000 annually.
The SECURE Act 2.0 created a helpful tax credit to make it easier for small businesses to offer retirement plans. This credit helps cover some of the money businesses contribute to their employees' retirement accounts, making it less expensive to provide an employer match.
For companies with 50 or fewer employees, the government offers a tax credit for up to $1,000 per year for each worker earning less than $100,000. This credit lasts for the first five years of the retirement plan. Even businesses with 51 to 100 employees can qualify for the tax credit, though the amount phases out over time.
Choosing the Right Small Business Retirement Plan
Selecting the right retirement plan depends on your business size, budget, and goals. Three popular options for small businesses include:
401(k) Plans: Best for businesses that want flexibility in contribution levels. Employer matches are optional but highly recommended to boost participation.
SIMPLE IRAs: Designed for small businesses, generally those with 100 or fewer employees. Employers must either match employee contributions up to 3% or provide a 2% non-elective contribution.
SEP IRAs: Ideal for self-employed individuals or small business owners with zero or few employees. Contributions are entirely employer-funded, allowing up to 25% of an employee’s compensation.
Learn more about how each type of account works in our prior post, The 3 Best Small Business Retirement Plans. Each plan has unique benefits and contribution limits, so consider consulting a financial advisor or retirement plan specialist to determine the best fit for your business.
The Bottom Line
Employer contributions to employee retirement plans offer undeniable advantages for both employers and employees. For employees, these contributions mean tax-deferred savings and a faster path to retirement security. For employers, the benefits include tax deductions, enhanced employee morale, and a competitive edge in attracting and retaining talent.
As retirement plan offerings evolve under policies like the SECURE Act 2.0, now is the perfect time to evaluate your options. By investing in your employees’ financial future, you’re also investing in the long-term success of your business—a true benefit that goes both ways.
If you’re ready to explore the win-win strategy of employer-matching contributions, contact us at JLS Accounting.Schedule your introductory call today!