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joeNOSPAM@bea.com
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 Posted: Tue May 13, 2008 2:15 pm Post subject: The *company* economics of a 401k match |
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Hi all. We know that we should do all we can
to get as much as we can of a company
matching contribution to a 401k. Can anyone
describe the benefit to, or discount to the
company for it's contribution? I am quite sure
a company bottom-line isn't lowered dollar-for-dollar.
I know of billion-dollar companies with differing
matching amounts and programs, and I wonder
why.
thanks,
Joe Weinstein
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Sandra Loosemore
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| Posted: Tue May 13, 2008 4:35 pm Post subject: Re: The *company* economics of a 401k match |
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"joeNOSPAM@bea.com" <joe.weinstein@gmail.com> writes:
| Quote: |
Hi all. We know that we should do all we can
to get as much as we can of a company
matching contribution to a 401k. Can anyone
describe the benefit to, or discount to the
company for it's contribution? I am quite sure
a company bottom-line isn't lowered dollar-for-dollar.
I know of billion-dollar companies with differing
matching amounts and programs, and I wonder
why.
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Well, different companies offer other benefits and perqs to employees,
as well; depending on where you go, you might find an employee stock
purchase program, tuition reimbursement, a whole set of health plans
to choose from, paid sabbatical leave, on-site gym or reimbursement
for joining one, etc. Presumably they offer this stuff because they
think it'll help them attract and retain good employees, or make
employees happier and more effective on the job.
When I worked at a Large Chip Manufacturer, they didn't match 401k at
all, but instead preferred to make a variable contribution into a
profit-sharing plan that vested over time. The actual amount of money
was quite generous, but as an employee you had to accept that (a) you
wouldn't know how much you were getting in advance and (b) you had to
stick around for N years before the money was actually yours. From
the company's point of view, (a) allowed them to cut back in lean
times, and (b) encouraged employee retention.
My current employer offers a straightforward fixed match on the first
5% of your salary with no vesting period, which I think is probably
more typical. It's a small company, management who set up the plan is
as interested in deferring part of their compensation and saving for
retirement as we peon employees, and I think it's seen as a fixed cost
of hiring good people.
-Sandra the cynic
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Mark Bole
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| Posted: Tue May 13, 2008 8:50 pm Post subject: Re: The *company* economics of a 401k match |
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joeNOSPAM@bea.com wrote:
| Quote: |
Hi all. We know that we should do all we can
to get as much as we can of a company
matching contribution to a 401k. Can anyone
describe the benefit to, or discount to the
company for it's contribution? I am quite sure
a company bottom-line isn't lowered dollar-for-dollar.
I know of billion-dollar companies with differing
matching amounts and programs, and I wonder
why.
|
It's just another form of employee compensation, I don't see why the
company wouldn't deduct it as a business expense. Why are you "quite
sure" otherwise? As to why companies don't all offer exactly the same
match, it's just part of their overall competitive strategy in the labor
market. Matching might also be a factor in meeting the rules for
highly-compensated employees (HCE's) vs. rank-and-file when it comes to
taxation of qualified retirement plans, but I'd have to research that to
be sure.
The main benefit to the company of 401k-match vs. straight pay is, it
removes some compensation from "base pay". So many things are tied to
base pay -- group term life insurance, unemployment, severance, pension,
vacation/sick pay, bonuses -- that anything the company can do to move
dollars out of base pay in favor of "supplemental" compensation such as
401k matching or group health insurance is a plus for the company and a
minus for the employee.
It's just another form of bundling. Almost anytime something is
bundled, it's usually better for the seller and worse for the consumer
(because it makes it harder for the consumer to comparison-shop).
-Mark Bole
--------------------------------------
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joeNOSPAM@bea.com
Guest
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| Posted: Tue May 13, 2008 9:08 pm Post subject: Re: The *company* economics of a 401k match |
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Thanks, I do understand the retention motivation etc, but I am asking
whether a company match is in fact simple hard cash debited
immediately
from the corporate coffers, or whether there is any tax preference,
interest-bearing
deferment account, or other money-denominated compensation available
to
the company that lowers the actual cost to the company.
Joe Weinstein
--------------------------------------
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joetaxpayer
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| Posted: Tue May 13, 2008 10:05 pm Post subject: Re: The *company* economics of a 401k match |
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joeNOSPAM@bea.com wrote:
| Quote: |
Thanks, I do understand the retention motivation etc, but I am asking
whether a company match is in fact simple hard cash debited
immediately
from the corporate coffers, or whether there is any tax preference,
interest-bearing
deferment account, or other money-denominated compensation available
to
the company that lowers the actual cost to the company.
Joe Weinstein
|
As most have stated, it's a benefit. It's treated as pay to the employee
as far as the accountants are concerned. (Of course, for companies that
'vest' the matching over 5 years or so, the accounting may be slightly
different.)
Part of the benefit is this - If there were no matching, and
participation were low among the common folk, the plan would be deemed
'top heavy' and the higher ups would have limits lower than the current
15.5/20.5K deposit limits. The match attracts a higher participation
level and reduces that risk of imbalance.
Joe
www.blog.joetaxpayer.com
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Tad Borek
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| Posted: Tue May 13, 2008 10:36 pm Post subject: Re: The *company* economics of a 401k match |
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joeNOSPAM@bea.com wrote:
| Quote: |
Thanks, I do understand the retention motivation etc, but I am asking
whether a company match is in fact simple hard cash debited
immediately
from the corporate coffers, or whether there is any tax preference
|
This is an obscure example, but there are benefits when employer stock
is used as the match in a 401k plan. It's a technical area to weed
through, has to do with both corporate tax and "nondiscrimination
testing" of 401k plans...if interested google:
ESOP KSOP MATCH TAX
-Tad
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Mark Bole
Guest
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| Posted: Wed May 14, 2008 2:33 am Post subject: Re: The *company* economics of a 401k match |
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joeNOSPAM@bea.com wrote:
| Quote: |
Thanks, I do understand the retention motivation etc, but I am asking
whether a company match is in fact simple hard cash debited
immediately
from the corporate coffers, or whether there is any tax preference,
interest-bearing
deferment account, or other money-denominated compensation available
to
the company that lowers the actual cost to the company.
|
I meant to mention in my earlier post, there is also an "immediate and
free" up-front benefit to the company, in that while the employee's
contributions are subject to payroll tax (7.65% FICA), the employer's
match is not. So if I'm an employer, I'm way ahead by getting my
employees to defer some of their compensation and accept a matching
contribution, in lieu of up-front pay, which would cost the employer its
normal share of payroll tax.
Also, I would place much more emphasis on Tad's comment: companies can
potentially make out like bandits (literally) when the company match is
offered in the form of stock instead of cash. In addition to the search
terms Tad suggested, try "401(k) corporate fiduciary lawsuit". Even in
the aftermath of Enron, these types of matching contributions are far
from being solely in the interest of plan participants.
-Mark Bole
--
Mark Bole
--------------------------------------
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kastnna
Guest
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| Posted: Fri May 16, 2008 8:41 pm Post subject: Re: The *company* economics of a 401k match |
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On May 13, 11:08 am, "joeNOS...@bea.com" <joe.weinst...@gmail.com>
wrote:
| Quote: |
Thanks, I do understand the retention motivation etc, but I am asking
whether a company match is in fact simple hard cash debited
immediately
from the corporate coffers, or whether there is any tax preference,
interest-bearing
deferment account, or other money-denominated compensation available
to
the company that lowers the actual cost to the company.
Joe Weinstein
|
Well the minimum goal of most profit-seeking companies is to break
even. That is, they have at least enough net revenue to pay all
expenses (including salaries, capital improvements, etc...). Given
that, the underlying business rule is that for every $1 spent, the
company gets at least $1 back (net). As I think you understand,
employee retention is just an extension of this. By keeping employees
happy, productivity rises and HR costs fall. So economically, it
actually improves a company's "bottom line" to pay its employees
competitive rates. The real question is "which method of payment is
best (match or otherwise, in this case)."
Tax-wise: The match is a business expense by which the company reduces
its overall taxes. The company also avoids its share of FICA by
contributing to a qualified plan instead of direct pay. Furthermore,
HCE's can generally contribute more as the non-HCEs contribute more.
Therefore, the match is a motivator for the non-HCE to participate in
the 401k so that the big wigs can participate in the 401k which
reduces their personal income taxes.
Another unseen benefit is that the company match is often an illusion
of pay that some will never really receive. Employees look at company
match dollars as part of their pay, but don't consider that it could
be taken away from them in the future (vesting schedules). That isn't
the case with upfront wages.
As for the "interest bearing deferment..." the simple answer is "no".
A qualified plan is a trust entity that is setup and run independent
of the company. The company cannot use funds in the trust for their
benefit (that is a HUGE no-no). The only exception is that many
companies do not credit the company match until the end of the month,
so I suspect the match from the pay-periods in the middle of the month
were likely in a company owned sweep account until that time.
--------------------------------------
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