401k Question, from the corporate view.

[amarowsky]

Does anyone know what type of benefits a large corporation receives for contributing to their employees 401k's? I talk to a lot of friends and family and they, on average, get really solid contributions from their employers. However at my employer, they are significantly lower.

My current plan, they contribute $.30 to every dollar I put in, to a MAX contribution of $540 annually. A little over $500 is better than nothing, but a lot of people I talk to have similar or much better contribution ratio percentages, with much much higher limits.

I work for Norfolk Southern railroad, which is well documented as being stingy to their non management positions. This is emphasized by the contrast of how well they treat their management (even very very entry level). I was kind curious to see how companies benefit (asides from attracting talent) from contributing to 401k's. I'm not certain, but there HAS to be some tax benefit to them for contributing a minimum.

I was looking around with some basic searches, but didn't have a lot of luck finding out what level of benefit corporations get for contributing. I just wanted to see what the minimum range is for them to get tax benefits, grants, or some sort of subsidy. Just to prove a hunch, I have a feeling the floor for a corporation to receive any sort of government help, would probably be within $100 of our $540 annual contribution. I wouldn't be surprised if was $540 on the nose.

Also if people wanted to share their employee match plans, it would be a good place to compare and contrast. Were in a contract year, and any other information is helpful. Or just to help young aspiring professionals to get a glance through the window of some benefits they could be expecting, or perhaps gravitate towards while looking their their careers.

[corn18]

Great question. I don't know the answer but would like to.

My company (Fortune 500 megacorp) matches 4% of your paycheck up to the max salary of $265,000 (IRS rule) and also gives you 1% of salary regardless of whether you contribute anything or not. So the max match could be 5% of $265,000 or $13,250. They also match 5% of any catch up contributions, but still only to the IRS max salary of $265,000.

I do find it interesting that my company gives us the match in company stock. I think that is typical. I can exchange it immediately for any of the funds in the 401k, so I do that to minimize my exposure to one stock. I like index funds.

One of the other features they provide is they allow after tax 401k contributions. This ups the max contribution to $53,000 / year. And they let me roll over the after tax contributions to a Roth IRA which means any earnings will also be tax free and I won't have to take RMDs when I turn 70 1/2. All great features.

Look forward to hearing about all the other plans out there.

Tom

[ua_guy]

To the OP, since you work for a railroad, is there also a pension plan in tandem with your 401k? Railroad companies are one of the last holdouts on pension plans, and I've heard they take care of their employees in terms of retirement pretty well.

Here at my job, we have a choice of a pension or 403b. I've gone with the 403b. They contribute 5% under 35 years of age, 7.5% after that. It's all subject to regular IRS limits for annual contributions, salary caps, etc. We are vested 100%.

It's actually not a bad retirement plan, dare I say "generous" compared to a lot of others I've had that only match up to 3% or require a long vesting period.

[MonkeyMama]

Mostly, retirement plans are set up within government rules and parameters. Any more generous plan would generally give more benefits to the employers and owners. Of course, my experience is mostly with small business. Most of my small business clients will happily do a safer harbor 3% match plan because the owners can all then put away $50,000+ per year into their retirement plans. Plans like this also cost a lot less to administer.

I would think most retirement offerings come with some sort of cost/benefit analysis, may be restricted by government rules (which will vary by type of employer and types of employees), and of course if you can shift compensation into tax-free retirement contributions this may come at the expense at salary. Just a good reminder to consider the entire compensation package when evaluating any job offer. Salary/wage is often a small piece of the pie.

[MonkeyMama]

P.S. My current employer did a 10% profit sharing match (10% of salary added to retirement funds - we do not contribute personally). This is of huge tax advantage to have compensation paid outside of salary. Less taxes to pay for both us and employer. Since we are all more highly paid (an office of a few professionals), I would presume that is how much he had to give us to be able to max out his own retirement.

Most my clients have low-paid employees and highly paid owners, so then that is a very different dynamic. They only have to give 3% to those employees for the owners to max out.

Since I work in the tax field, I would expect any employer I consider to be more savvy in this area. Certainly there are employers who don't offer any retirement plans or don't realize the benefits.

[QuarterMillionMan]

I'm employed in the public sector (457 plan). My employer matches 4%. The max allowed by the IRS is $24,000 (both employee and employer contributions) for a 49 year old such as myself due to turn 50 this year, $18,000 max under that age. For illustrative purposes say an employee makes $50,000 per year. Four percent is $2000 (4% match). The employee then could contribute $22,000 (50+) or $16,000 (under 50), for the year 2015. BTW I'm currently on par to reach my IRS max at $24,000.

[Like2Plan]

I'm employed in the public sector (457 plan). My employer matches 4%. The max allowed by the IRS is $24,000 (both employee and employer contributions) for a 49 year old such as myself due to turn 50 this year, $18,000 max under that age. For illustrative purposes say an employee makes $50,000 per year. Four percent is $2000 (4% match). The employee then could contribute $22,000 (50+) or $16,000 (under 50), for the year 2015. BTW I'm currently on par to reach my IRS max at $24,000.

QuarterMillionMan,
I guess the 457 plan is different from the 401K in that the max tax advantaged contributions made by the employee is 18k (under 50) and 24k (50 and over) excluding the company match. Some plans allow additional after tax contributions above the 18/24 limit. (The total of elective salary deferral plus employer matching contributions is limited to $53,000 for 2015.)

Link to irs page on pension plan limits

[Goldy]

We have an interesting plan with 100% match up to 6% and then a profit sharing contribution of another 6%. Total of 12% all immediately vested. Half of our 401k balance is thanks to this.

[autoxer]

I'm not certain, but there HAS to be some tax benefit to them for contributing a minimum.

I was looking around with some basic searches, but didn't have a lot of luck finding out what level of benefit corporations get for contributing. I just wanted to see what the minimum range is for them to get tax benefits, grants, or some sort of subsidy. Just to prove a hunch, I have a feeling the floor for a corporation to receive any sort of government help, would probably be within $100 of our $540 annual contribution. I wouldn't be surprised if was $540 on the nose.

I may be biased as the director of a small company, but I see it as an employee benefit, not something we would only do for a subsidy. It is certainly a more tax efficient way to offer compensation, but I believe that benefits both the employer and employee. Unfortunately 'tax efficiency' isn't a very high priority for most employees or you would see much higher contribution rates.

Surely we can play by the rules that our government has written as MonkeyMama described and tilt the benefit different ways, but ultimately it is still money paid out from the company to the employees. The government certainly isn't helping us fund it.

[Jluke]

Isn't one benefit to a company for providing a 401k (or other retirement vehicle) so they do not have to fund a pension? Some companies still do both, but imagine it is rare.

[autoxer]

Isn't one benefit to a company for providing a 401k (or other retirement vehicle) so they do not have to fund a pension? Some companies still do both, but imagine it is rare.

Companies aren't required to offer pensions or 401k's. They are a good thing to offer if they want to retain employees, but they aren't required to offer them.

[LivingAlmostLarge]

My DH's company was 200% match for up to 3% contribution. So it was basically 6% company match. Vested immediately

[jIM_Ohio]

I may be biased as the director of a small company, but I see it as an employee benefit, not something we would only do for a subsidy. It is certainly a more tax efficient way to offer compensation, but I believe that benefits both the employer and employee. Unfortunately 'tax efficiency' isn't a very high priority for most employees or you would see much higher contribution rates.

Surely we can play by the rules that our government has written as MonkeyMama described and tilt the benefit different ways, but ultimately it is still money paid out from the company to the employees. The government certainly isn't helping us fund it.

+1

The benefit is primarily to employees.

In my 2 years as a financial advisor I learned a little bit about how the back end of this was set up, here are a few highlights:

1) For a business owner to use the plan, there is a "means test" to make sure it is used by the average worker and not "highly compensated employees". The HCE want to use the plan, the match will likely be very high.

For example Sogeti has a 100% or 150% match on their contributions, clearly the higher level employees like the use the 401k would be a logical assumption (or it is just a perk to attract top talent, you decide).

2) A smart small business owner would have multiple LLCs set up, as different benefits work better under certain business structures. For example there can be one 401k plan for one LLC and a more generous 401k plan under a different LLC, and having the owner in the second allows for more generous matches. A C corp allows health care to all employees, so having a C corp exist with owner in it is a way around the tax code which allows owner to pay for their own insurance and take a tax deduction.

3) Tax attorneys and CPAs which know a business owner well can find them the best way to do all the above according to the tax code.

4) A SEP IRA is more valueable to the business owner than the 401k until a certain threshold, so unless your contributions plus match are greater than a SEP contribution, the 401k is clearly for the employee and not the business owner.