incentives to company's 401k contributions?

The company informed us that on January 1 they will be making a bonus contribution to our 401k plans that equals 5% of our salary. And effective next year they are increasing the match on our contributions from 25 cents on the dollar to 50 cents on the dollar.

What is the incentive to the company to invest more of their profits into their employees’ 401k plans? Is there a tax benefit the more they contribute? Can they write it off? Any financial typs know the answer to this. I’m sure they aren’t just incurring many thousands of dollars more expense just because they are nice guys (they ARE nice guys, but that is beside the point).

Lovable Rogue

US only: There is a tax benefit for a company contributing into a qualified 401(k) plan, but the main benefit is for employees. The company can take their contributions into the plan as a deduction against earnings and profits in calculating their income tax.

However, they could get the same deduction by any number of other business expenses – such as charitable contributions, for one example. By putting the money into a 401(k) plan, they are offering a tax-favored savings/investment vehicle to the employees. So the bottom line is, yes, sure, they are doing it primarily to be nice to employees.

If there is a vesting schedule for the company’s contributions (You get 20% of the company’s contributions if you stay for 2 years, 40% if you stay for 3, 60% if you stay for 4, etc–if you leave early the non-vested money goes back to the company), it encourages workers to stay at least until they vest. You might be more likely to stick around if by leaving you lose 5k of the company’s contributions to your 401k.

It’s easier to attract and keep high quality employees with a good benefits package. Happier employees also tend to be more productive.