Following up on my article last month on the benefits of providing financial wellness education to employees, this article’s specifically designed to increase awareness of the benefits your HVAC company could enjoy as a result of a company-sponsored 401(k) match for your employees.
With regard to benefits packages in general, we work in an industry that has not yet come close to maturity. I realize there are companies in the HVACR industry that offer stellar benefits packages, and I’m very fortunate my employer happens to be one of them, but this is the exception rather than the rule. So, what does this mean to you, and why should your company be any different? Here are just a few of the many reasons.
RISE ABOVE THE COMPETITION
The industry is still on the approach to maturity in regard to compensation structures and benefits programs, and such a program can really set your company apart in terms of your image, reputation, and ability to attract and retain quality employees. I emphasized retain because that’s the hard part. Nearly any company can attract new employees through front-loaded incentives, such as signing bonuses or artificially inflated rates of pay, but they seldom work over the long haul.
A properly structured company-sponsored 401(k) match is perhaps among the best answers to the question on how to best reward longevity in your company and reduce needless turnover we’ve all suffered from at one point or another. A properly structured plan has a vesting period — typically several years — that an employee must stay with your company on a consecutive basis to be eligible to leave with all the money you provided as a match to his/her contributions.
Consider the following example: Your HVACR company offers a 100 percent match on the first 3 percent of income its employees contribute, and the employer match is subject to a four-year equally graded vesting period. In other words, the employee does not realize the full benefit of the 3 percent right away; rather, he/she is 25 percent vested after one year, 50 percent vested after two years, 75 percent vested after three years, and fully vested after four years. One important point before I continue: When I say years, I’m referring to years after the employee contribution begins. If your company has a one-year waiting period before employees can contribute, then the employee is not actually fully vested in the plan and your match until he’s been working for you for five full years. The takeaway here is, once employees get to the two- or three-year mark with your company, they’ll start thinking very hard about leaving before they’re fully vested in the plan and in your match. If they leave, they’ll lose the percentage of the match according to the extent to which they are not yet vested.
Company-sponsored 401(k) matches are not as expensive as you may think, or at least not as expensive as your projections look on paper. In the example outlined above, as well as in nearly any other example we could use, you’ll likely have a number of employees who’ll simply not contribute — or will not contribute heavily enough to earn the full match. Yet another group of employees will likely leave your company regardless of the fact that they’re not yet fully vested in your match. Both of these examples will reduce your projected expense because you’re either not matching what you anticipated or are receiving some of your previous matches back.
It’s also important to understand the IRS requires a discrimination test to be performed on all 401(k) plans to ensure the average contributions of what it refers to as “highly compensated employees” (in tax years 2013 and 2014, any individual earning more than $115,000 per year or any individual owning 5 percent or more of the business) in any company do not exceed the average contributions of employees who are not highly compensated ($114,999 and down). What this ultimately means is if you’re a highly compensated employee and/or own more than 5 percent of your company, you may have to find a way to increase the average contribution across your employees who are not highly compensated, as defined by the IRS, if you want to maximize your own ability to contribute as well as that of any other owner or employee earning in excess of $115K per year.
Another point to remember about company-sponsored 401(k) matches is that they’re not subject to payroll taxation. In other words, you can advertise the match as part of your compensation structure, but the dollars spent on the match will be much cheaper to you than dollars spent on straight compensation — all of which are subject to payroll tax.
Finally, it’s very important to realize a 401(k) matching plan is far less expensive than a defined pension program. I would strongly encourage any company that’s considering a defined pension program to look very hard at a hefty 401(k) match instead. Let your employees be part of, and have some skin in the game with regard to, their own financial futures. Additionally, you’ll suffer none of the significant administrative expenses associated with a defined pension program, and 401(k) matches are one-and-done. In other words, once you book the expense associated with matching your employees’ 401(k) contributions, you’re done. There are no future payables (liabilities) to report on your balance sheet that can significantly affect the value of your company when it’s time to sell.
Beyond the tangible benefits listed above, there are also immense intangible benefits. Proper education for your employees centering on what 401(k) plans really are, how much they can expect their accounts to grow based on their contribution rate, years left to work, anticipated market returns, and what your match will mean to them over the years speaks volumes about whether or not they work for an employer that’s truly appreciative of their efforts and interested in their financial future.
Thanks for reading, and should you have any further questions regarding 401(k) or any other part of your benefits structure, please don’t hesitate to contact me. My advice to readers of The NEWS is always free.
Publication date: 9/21/2015