Sharing the Wealth: Tax Cuts Lead to Larger 401(k) Employer Contributions

 In Retirement Planning & Wealth Management

Retirement Director Ben Rizzuto discusses the approaches different companies are taking related to reduced corporate taxes as a result of the Tax Cuts and Jobs Act.

As companies benefit from reduced taxes related to the Tax Cuts and Jobs Act, corporations are choosing to give back to their employees and share a little bit of the windfall with Main Street. A number of companies have already announced intentions to increase their plans’ retirement contributions including Cigna, Visa, Honeywell and Aflac.

The interest in larger contributions has not been limited to large plans as Peoples Bancorp increased its 401(k) match from 7% to 8% in its $30.5M plan, and Advance Financial, a Nashville, Tennessee-based provider of open line-of-credit loans and other financial services, announced that it would increase its 401(k) match from 3% on a dollar-for-dollar basis to 5% in its $2.3M plan.

With the corporate tax cut as one of the permanent changes from recent tax reform, companies are figuring out the best way to deploy the extra cash from their condensed burden. While many have not yet taken action – as changes are long-term in nature and analyses on a corporate finance level are still in the works – some have chosen to take the lead through onetime bonuses as a way to share the wealth.

Like those in the news recently, companies are increasing their 401(k) contribution matches to acknowledge their employees. This may be more helpful to employees in the long run, but could be a larger financial burden on the employer. Other options include fully funding their pension plans as companies and expanding value-add benefits within retirement plans such as access to financial planning and wellness.

Capturing the Opportunity

Financial advisors have an opportunity to provide guidance to clients looking to execute this opportunity to thank their employees.

Start by reaching out to business owner end clients, making sure they understand the effects of tax reform and how it affects their business. Help them weigh the benefits of sweetening the pot for their employees or improving their retirement plans.

Unfortunately, this boon misses the millions of Americans that don’t have a retirement savings plan through their employer. In fact, only 45 percent of private-sector workers participate in an employer-sponsored retirement plan. But in the end, you can show value by helping clients navigate the many new options in front of them and how they can best achieve their business goals as a result of tax reform. We discuss this further in our latest edition of Plan Talk, our Defined Contribution podcast.

Also note that for those companies that are pass-through businesses and aren’t C corporations, the 20% Qualified Business Income deduction is scheduled to sunset in 2025. The next few years could provide these business owners with the opportunity to give back to their employees, keeping in mind that the overall tax benefit that they get from their retirement plan contributions could be lower.

Learn more about retirement strategies and solutions through our Defined Contribution program.

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