401(K) Employer Match Question


I had a quick question about 401(k)'s, particularly in regards to employer contributions.

For 2020, the IRS limitation on employee contributions to a standard 401(k) plan is set at $19,500. The employer match is capped such that the combination of employee + employer contribution cannot exceed $57,000. Typically as a perk, companies will fund a safe harbor provision (say 2-3%) and provide a match of 50% of employee 401(k) contributions, up to a maximum percentage (let's say 6% of eligible annual salary (which is base salary here)).

I was curious why more employers don't offer the full $37,500 of potential pre-tax contributions to their employees? I understand that there exists an IRS rule that requires nondiscriminatory matching across all types of employees -- from "rank-and-file" to senior management -- but at a small private equity or hedge fund, could one make the case to move towards a model where employers max. out this contribution? Perhaps restructuring annual compensation for employees such that the annual bonus' cash compensation component would be reduced by $37,500 (assuming there is no current employer matching program in place). This would result in after-tax annual savings for the employee of $13,125 (35% tax rate).

Maybe I'm missing something here -- thoughts?

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Comments (9)

Mar 30, 2020 - 8:28pm

This would probably be best directed at bogleheads.org

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

Mar 30, 2020 - 9:04pm

For profit companies do not offer the full amount because they want to make more money.

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Mar 30, 2020 - 9:22pm

Sorry, not sure how a dollar-for-dollar switch from (i) a reduction in cash compensation (which is taxed as ordinary income to the employee), to (ii) an increase in employer 401(k) contribution (which is not taxed to the employee) would impact the employer's financial position? From the the company's perspective, it's still compensating the employee with an incremental $37,500.

Also, I believe that employer contributions are exempt from federal, state, and payroll taxes, if they fall under 25 percent of the total compensation paid (or accrued) during the year to eligible employees participating in the plan. Safe to safe at a PE firm or HF, $37,500 falls under 25% of annual total compensation. Even more incentive for the company to do this.

Mar 31, 2020 - 6:50am

Then, I don't really understand your question. Aren't you asking about the employer match?

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Mar 31, 2020 - 11:19am

administratively, it's a fuckin nightmare. there are discrimination rules and all sorts of testing so that companies are treating employees from a benefit standpoint "fairly." so while I've seen some executive comp packages that have employers add a "discretionary match" on top of that to fill up this $57k maximum, it's rare.

most companies offer the ability for you to contribute your own dollars to that, in the form of an "after tax non roth" contribution (google "mega backdoor roth" for more info). it's possible at some firms, but not all.

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