401(k) employer contribution rules can be complicated, especially if you have not been a plan sponsor for long. Do you have to match your employee’s contributions? What is nondiscrimination testing? These are just a couple of the questions you might ask as a plan sponsor. Knowing some of the most common 401(k) employer contribution rules can help you run your plan more smoothly and avoid legal complications due to poor planning.
Discretionary Matching Contributions
Employer discretionary requirements will vary depending on the way the 401(k) plan is set up. There is no minimum amount that employers must match, and some choose not to match contributions at all. Those who do match their employees’ contributions typically match a set percentage. An example of this would be an employer that matches the employee contribution 100% up to 6% of their yearly salary. In this case, if the employee makes $40,000 per year and contributes 6% of their annual salary the employer would match that amount. The employee can contribute more than 6% but anything over 6% will not be matched.
While employer matching contributions are not required for Non-Safe Harbor plans, employers who choose to match contributions must meet the requirements set under the Employee Retirement Income Security Act (ERISA).
Nondiscrimination Testing
401(k) retirement plans provide significant tax benefits for employers which is why there are strict compliance regulations. For a company to continue receiving its tax benefits, it will need to pass all nondiscrimination tests set forth by the federal government. Current IRS requirements include that the plan must not favor highly compensated employees such as owners, executives, or officers of the organization.
Contribution Limits
While employees have a specific limit for their yearly contributions, employer 401(k) contributions are a little different. Rather than having an individual contribution limit, the employer is limited by the combined contribution of the employee and employer. For 2022 the total contribution limit for both employee and employer is $61,000 or up to 100% of employee compensation.
Now that you know the most common 401(k) employer contribution rules, you can work towards making your plan include employer contributions or improving your current plan’s contribution guidelines. If you have additional questions about the rules for employer contributions, contact RPCSI today!
