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401(k) — What Contractors and Companies Need to Know

In order to retain quality contract employees, companies have to keep them happy. And what makes these types of workers happy? A concrete financial benefit. Companies now offer something that was much less common in past decades: 401(k) to contract workers.

This is great news, because it is just that—new. It’s new to companies and to workers who haven’t received the benefit. So both need to fully understand it before they can opt in.

Are you an eligible employee?

An employee must be legally classified as an employee to receive 401(k) benefits. Contract employees’ participation depends on eligibility requirements. Employees must be:

  • W-2 employee
  • At least 21 years old

Is providing a 401(k) option worth it for my company?

From a recruiting and retention standpoint, it’s worth it to offer contractors the option to participate in your company’s plan. Sure, the tax benefits are cost-effective, but there’s more to it.

When you provide a 401(k) option, it shows that you actually care about all of your employees, regardless of their title or classification. You can help ease the minds of people worried about their retirement.

Even when provided with an option to invest in the plan, some contractors may not be able to take advantage of the benefit. Minimum wage workers, for example, are dubbed as more likely to withdraw the cash to meet immediate financial needs. This requires tax penalty payments due to the early withdrawal.

A good way of dealing with issues is to provide a company 401(k) match so that employees don’t have to contribute out of their own pockets. It’s cost effective for the company due to tax deductions and helps employees with tax savings.

Things a business should consider about 401(k):

  • It impacts recruiting, retention, and employee engagement efforts.
  • It’s likely your competitors offer the benefit to their contract employees.
  • Offering it can create positive brand awareness and employer-of-choice recognition.

As long as a 401(k) plan meets Internal Revenue Code coverage requirements, an employer is not obligated to include all employees in the 401(k) plan. But excluding employees can have a severe negative impact on employee engagement which may increase costs rather than save them.