Are Small Businesses Required to Provide a 401(k) Match?


As a small-business owner, if you’re thinking about sponsoring a 401(k) plan, you may wonder about a company match. Are small businesses required to offer a 401(k) match, or is it merely an option? The short answer is no, you don’t have to provide matching contributions to your employees’ 401(k) accounts, but there are good reasons to do it anyway. Below, we discuss the pros and cons of providing employer matching contributions as part of your 401(k) plan.

Offering an Employer Match Makes Employees Happy

The best — and arguably most motivating — reason to offer an employer match is because it’s a benefit employees will value. Employer satisfaction and loyalty has been mutating for a long time — more quickly post-Covid. An entire category of memes has been born just to mock employers who believe that buying workers pizza for lunch or allowing them to wear jeans to work on certain occasions is enough to keep them happy and invested in the company and its mission. Workers are definitely choosier today about which company they work for than they used to be.

That’s why simply having a 401(k) at your company makes you more attractive to potential employees than companies that don’t. By extension, if you offer employer matching funds, you will be ahead of any competitors you have that don’t. If most of your competitors offer matches, offering one at your company won’t put you ahead, but it will still help because you will no longer be behind.

Offering an Employer Match Helps You Save Money on Taxes

In this space, we have often talked about the fairly sizable tax breaks you get for starting a 401(k) — you can write off up to $5,000 per year for three years. But employer matching funds are deductible every year, for as long as you make them.

Depending on how many eligible employees you have and how many opt to participate in the program, you could pay a few thousand in matching funds or tens of thousands. Regardless, it’s all tax deductible. This actually can save you money twice. For instance, say you hire an employee and offer to pay them $50,000. That entire amount is a labor cost for your small business. But what if you offer to pay them $45,000, but you explain to them that you will be contributing thousands more to their 401(k), should they choose to participate? If the amount was the same — $5,000 — you would come out ahead, because the $5,000 is deductible when it’s an employer match to a retirement plan, but it’s not when it’s simply a labor expense.

Offering an Employer Match Makes You Feel All Warm & Fuzzy Inside

One reason small-business owners want to make employees happy is because happy employees work harder, are more productive and are more loyal. These are all benefits for your company. But what if it didn’t benefit your company? Would you still do it (assuming it didn’t harm your company)? Maybe not, but if you did, you could still derive some personal benefits.

Employer matches aren’t charity in the same way that raises aren’t charity, but giving employees more compensation for the work they do — assuming they are deserving — will make you feel less like a Scrooge and more like Robin Hood (without the stealing part). If this isn’t enough to motivate you, think about the service you would be doing your employees by helping them save for their futures — something they might not be able to do without your help. And it wouldn’t just be them you were helping — it would be society at large. People who can afford to live comfortably in retirement have less need for social programs funded by the government such as Medicaid, SNAP (food stamps) and Supplemental Security Income. They would visit food banks and soup kitchens less frequently, leaving these resources for other needy people.

Of course, there are some downsides to offering employer matches.

Offering an Employer Match Costs Money

Even though employer matching funds are tax deductible, they are still an expense you have to fund. If you have very few employees, an employer match might not cost much, but the government defines a small business as one with fewer than 500 employees. So if you have hundreds of employees and you offer a match for their 401(k) contributions, this will definitely be a noticeable expense.

Offering an Employer Match Can Mean More Paperwork

So much is done electronically now that the administrative side of providing an employer match is not nearly as onerous as it used to be. You have to set it up, but once it’s done, it can occur automatically every pay period, depending on how you manage payroll.

Offering an Employer Match Can Be a Hassle with Respect to Audits

When 401(k) plans were conceived, the government made rules that were intended to prevent companies from directing most of the benefit toward highly compensated employees. After all, the point of 401(k)s is to benefit everyone who is eligible. To this end, the IRS requires businesses to conduct audits to prove they are being fair and following the rules. These audits can be time-consuming and expensive, and businesses are required to find their own qualified auditors — the IRS doesn’t do it for you. Additionally, if any errors are found, businesses must correct them — at their expense.

That’s why some businesses choose to open a Safe Harbor 401(k). With this type of retirement plan, you are exempt from audits. But depending on what type of Safe Harbor plan you choose, you may be required to provide employer matches — even if the employees themselves do not contribute to their accounts.

Employer Matches: Yea or Nay?

We’ve given you a lot to think about. When you’re done, contact us to help you set up the type of 401(k) plan you want to offer your employees.

Secure your future today. Enroll in your 401(k) plan now.

Jennifer Stott
Jen is experienced at creating and managing marketing content and blogs. She enjoys communicating about this complex industry.
Secure your future today. Enroll in your 401(k) plan now.