401(k) plans boost company match due to tax reform, labor market

Thanks to tax savings that businesses have realized as a result of tax reform and the competitive labor market, employers are increasing the amount of money they give employees in the form of a 401(k) match, according to retirement plan advisers and consultants.

The 2017 tax law cut the federal tax rate on the profits of C corporations to 21% from 35%. The law also granted businesses structured as pass-through entities, such as partnerships, S corporations and sole proprietorships, a 20% deduction on profits.

The tax windfall helped drive after-tax corporate profits to their highest-ever level in the third quarter, according to Federal Reserve data.

Several companies have used their newfound savings to buy back stock at record levels, give one-time bonuses and offer pay increases to employees. Companies also appear to be using their padded coffers in part to boost contributions to their 401(k) plans.

Roughly 22% of plan sponsors made a change to their company match policy in 2018, a "dramatic increase" over the prior year, according to the annual defined-contribution report published by Callan, a consulting firm. A third of these employers increased their company match, by far the most popular course of action relative to other changes.

Aflac, Honeywell, Visa and MetLife are among the public companies that announced a boost to their company matching formulas. Visa hiked its match to 10% from 6%, for example, while Aflac began matching 100% of the first 4% of employee contributions, up from 50%.

According to Callan, another 35% of plan sponsors said they'd change their match policy this year, and nearly a quarter of those companies said they'd increase their match.

In this market, attractive benefits packages can play a crucial role in employees' decision-making process for job offers.

Of those companies that increased their match in 2018, half were employers in the technology sector, with the remainder a mix of health care, financial services and telecommunications firms, according to the Callan data. The 401(k) plans skewed to the larger end of the scale - from $100 million in assets to as large as $5 billion.

Large companies tend to be structured as C corporations. Their new tax break on corporate profits is permanent, whereas the break for pass-through entities is temporary.

The majority of private businesses in the U.S. - more than 90% - are structured as pass-throughs, according to the Tax Foundation. Their 20% tax deduction, which is only available to pass-throughs meeting certain qualifications, is set to expire in 2026 unless extended by Congress.

Pass-throughs that increased their 401(k) match could scale back the benefit at this time if after-tax profits shrink, advisers said, since most 401(k) plan documents refer to a match as being subject to the employer's discretion. That dynamic occurred during the 2008 financial crisis, they said.