FAQs:

+ How Does Employer Contributions to a 401(k) Work?

There are several ways for an employer to contribute towards an employee's 401(k) plan.

• Non-elective contribution
  • A set percentage amount whether the employee contributes or not. A common one is the Safe Harbor 3% non-elective. For example, if the employee’s salary is $75,000, the employer will put $2250 into the employees 401(k).
• $1 for $1 match
  • The employer puts in the same amount of money you do — up to a certain amount. A common match formula is $1 for $1 up to 4%, which is also an approved Safe Harbor formula. For example, if the employee's salary is $50,000, the employee must put in $2,000 to receive $2,000.
• Partial matching
  • The employer will match part of the money you put in -- up to a certain amount. A common partial match formula is .50 cents on the $1 up to 6%. For example, if the employee’s salary is $100,000, the employee must contribute $6,000 to receive $3,000 from the company.
• Profit-Sharing
• Based off company profits, the employer can delegate profits towards the employee’s 401(k). This usually happens towards the end of the year and is an optional feature included in the 401(k).

+ Are 401k Contributions Tax-Deductible for Employers?

As noted by the IRS (Internal Revenue Service), employer contributions are deductible for the business’ federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code. In plain language, employer contributions can create a tax shelter for the business. Instead of giving the government more money in taxes, shelter it by giving it to themselves and employees!

+ How Much can an Employer Contribute to a 401k in 2021?

The total limit for employer and employee contributions combined for 2021 is $58,000. Of that, the individual deferral limit for 2021 is $19,500. $26,000 if the participant is 50 years of age or older. The difference of the $58,000 versus the individual deferral needs to be an employer contribution which can come in the form of matching, non-elective, or profit-sharing contributions. The highest salary the company can match is $290,000 for the year 2021.