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I was trying to understand why a company would offer 401k matching instead of higher salaries to employees.

I read that some states require companies to offer retirement things which makes sense.

One answer in this question mentions matching encourages more employee buy-in to a 401k, allowing Highly Compensated employees to benefit more. Presumably Highly Compensated employees are the owner or management who have the power to decide whether the company includes a 401k. But this answer doesn't make sense, because there is no reason for the Highly Compensated employees to prefer a 401k instead of just privately doing a Roth or IRA. The linked question says that a company 401k even limits the amount they can benefit from IRAs.

A comment chain of another answer in the link debates whether companies save taxes when using 401k matching instead of salary increase, but it didn't resolve in agreement.

Which leads to my question. Is there a tax benefit to employers to offer 401k, or 401k with matching, instead of increasing employee salaries?

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    The Highly Compensated Employees can prefer a 401k over an IRA or Roth because the contribution limits are higher for a 401k and they make too much to do a Roth. They can still do an IRA, but it is non-deductible. In many cases they can convert it to a Roth as well. This does not answer the question, but is another reason for the choice.
    – Ross Millikan
    Mar 7, 2022 at 4:16
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    Backing up Ross there: 20,500 >> 6,000. Its really not even close at all.
    – R. Hamilton
    Mar 7, 2022 at 16:28
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    @R.Hamilton: Of course it is "20,500 + 6,000" vs "6,000", since one can still do the backdoor Roth IRA even when contributing to 401(k)
    – Ben Voigt
    Mar 7, 2022 at 16:29
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    Technically correct, Ben, which we all know is the best kind of correct
    – R. Hamilton
    Mar 7, 2022 at 16:30

2 Answers 2

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Salaries are subject to a 7.65% payroll tax; 401k matches are not.

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    There is also vesting, where unvested funds can be reallocated when the employee leaves.
    – rtaft
    Mar 7, 2022 at 18:17
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    Here's one source for the 7.65% payroll tax.
    – Gabriel Staples
    Mar 8, 2022 at 14:56
  • Is not the 401k also subject to tax - on withdrawal?
    – chux - Reinstate Monica
    Mar 8, 2022 at 16:59
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    @chux-ReinstateMonica The employees pays tax on withdrawal. But I'm assuming the employer doesn't? In which case the employer still saves on tax.
    – roobee
    Mar 12, 2022 at 21:21
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    If you are self-employed, you pay a 15.3% self-employment tax on your income, which goes towards SS and Medicare. If you have an employer, 7.65% of your income is withheld for the same purpose, and your employer makes up the difference in the form of the payroll tax. 401k disbursements are not subject to either, so 401k matches are not subject to payroll tax.
    – chepner
    Mar 12, 2022 at 21:31
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They can offer it as a benefit, but not everybody will take advantage.

If you make 50,000 and the maximum match is 5%; then they have to budget 2,500 for the match. Some people won't participate. Some won't fully participate. That increases the company profits, while being able to advertise the match.

Also if they increase your salary instead of the match, then the increase is forever. Plus they have to say we don't match.

Sometimes the benefit to the company isn't because of taxes.

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    This is true, but I don't find it fully convincing. A employee candidate who ignores a benefit will not cost money if hired, but that employee also won't value the benefit.
    – Brian
    Mar 7, 2022 at 14:29

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