Which Match is Best For Your Business?
Offering a 401(k) plan is one of the best ways to attract and retain great employees. But for many business owners, the question isn’t just whether to offer a plan—it’s how to structure the employer contributions. Should you provide a safe harbor match, a discretionary match, or even a profit-sharing option? Each approach comes with its own benefits, costs, and compliance requirements.
Ultimately, the decision comes down to the business structure and its employees. So, which 401(k) matching option is right for your business?
Why Employer Matching Matters
Introducing employer contributions to a 401(k) plan is a fantastic employee perk. It can help you win top talent in a competitive industry and decrease expensive employee churn.
- Attract and retain employees – Workers increasingly expect retirement benefits.
- Encourage participation – Employees are more likely to contribute when they know their employer is adding to their savings.
- Offer tax advantages – Employer contributions are tax-deductible, and in some cases, they can help business owners meet IRS compliance tests.
However, not all employer contributions are structured the same way. Let’s break down the three most common approaches.
1. Safe Harbor Matching: The Compliance-Friendly Option
A safe harbor 401(k) plan is designed to pass IRS nondiscrimination testing automatically. Normally, a 401(k) plan must meet strict rules to ensure it doesn’t favor highly compensated employees (HCEs) over rank-and-file workers. Safe harbor plans eliminate this concern by requiring employers to make guaranteed contributions.
How It Works
Employers must contribute in one of the following ways:
- Basic Safe Harbor Match – The company matches 100% of the first 3% of an employee’s contribution plus 50% of the next 2% (for a total of up to 4%).
- Enhanced Safe Harbor Match – The company matches at least 100% of the first 4% of an employee’s contribution.
- Non-Elective Contribution – Instead of a match, the employer contributes at least 3% of each eligible employee’s salary, whether or not they contribute to the plan.
These contributions are immediately vested, meaning employees own them right away.
Pros
✔ Automatically satisfies IRS nondiscrimination tests
✔ Encourages more employees to participate
✔ Contributions are tax-deductible
Cons
✘ Required contributions, even in slow financial years
✘ Higher costs than discretionary matching
Best for: Companies that want to avoid IRS testing and ensure all employees get contributions.
2. Discretionary Matching: Flexibility with Some Compliance Risks
A discretionary match means the employer decides how much to contribute, and they can change or suspend the match at any time. This option offers flexibility but requires the business to pass annual IRS nondiscrimination testing.
How It Works
- The employer sets their own matching formula, such as 50% of the first 6% of an employee’s contributions.
- Unlike safe harbor matches, vesting schedules can be applied. (For example, employees may need to stay with the company for 3-5 years before they fully own the employer’s contributions.)
- Because this type of match is discretionary, employers can reduce or eliminate the match during difficult financial periods.
Pros
✔ Flexibility to adjust contributions as needed
✔ Can encourage employee retention if vesting schedules are used
✔ Contributions are tax-deductible
Cons
✘ Subject to annual IRS testing
✘ Uncertainty for employees, which may reduce participation
Best for: Companies that want flexibility while still offering a competitive retirement benefit.
3. Profit-Sharing: Rewarding Employees for Business Success
A profit-sharing plan allows employers to contribute to employee retirement accounts based on company profitability. Unlike matching contributions, employees do not need to contribute to receive employer contributions.
How It Works
- Employers decide how much to contribute each year, with a maximum of 25% of total eligible payroll.
- Contributions can be allocated evenly across all employees or based on a formula that favors certain groups (such as those with longer tenure).
- Profit-sharing plans can be combined with a 401(k) and subject to vesting schedules.
Pros
✔ Full flexibility—employer only contributes when the business is profitable
✔ Can be used as a reward for high-performing employees
✔ Contributions are tax-deductible
Cons
✘ Can’t be used to satisfy IRS testing requirements on its own
✘ Employees may not view it as a reliable retirement benefit
Best for: Businesses that want to share profits in strong years but maintain flexibility during downturns.
Choosing the Best Option for Your Business
The right employer contribution strategy depends on your company’s goals, budget, and workforce needs.
- Want to guarantee contributions and avoid compliance testing? A safe harbor match is the best choice.
- Need flexibility and cost control? A discretionary match gives you control over contributions each year.
- Looking to tie retirement benefits to company performance? A profit-sharing plan may be the way to go.
Some businesses combine these strategies, such as offering a safe harbor match alongside a profit-sharing plan for additional rewards.
A Quick Comparison
| Contribution Type |
Vesting |
Flexibility |
Compliance Testing |
Cost Predictability |
| Safe Harbor Match |
Immediate |
Low |
No Testing Required |
Fixed Cost |
| Discretionary Match |
Employer Decides |
High |
Must Pass IRS Testing |
Variable |
| Profit-Sharing |
Employer Decides |
High |
Must Pass IRS Testing |
Variable |
Final Thoughts
Matching contributions are not merely a regulatory decision; they serve as a strategic tool for attracting, retaining, and rewarding employees. Whether you choose a safe harbor match, a discretionary approach, or a profit-sharing plan, the key is to align your contributions with your business goals.
If you’re unsure which structure works best, a retirement specialist at Helm TPA can help you navigate the rules and optimize your plan for both compliance and long-term success.
Contact us today to discuss in more detail
