How Does the Employer Match on my Employee 401(k) Work?

Based on the specifics of your employer’s 401(k) plan, your contributions to your retirement savings may be matched by employer contributions in several ways. Employers usually match a percentage of employee contributions, up to a certain portion of their total salary. Other employers match employee contributions up to a certain dollar amount, regardless of employee compensation.

Investopedia published an article, “How 401(k) Matching Works,” that explains the mysteries of employer match contributions.

The specific terms of 401(k) plans vary considerably. Other than the requirement to adhere to certain required contribution limits and withdrawal regulations of the Employee Retirement Income Security Act (ERISA), the sponsoring employer decides on the specific terms of each 401(k) plan. Whatever the match amount, it’s free money added to your retirement savings. Don’t neglect to take advantage of it!

Employers typically match employee contributions, up to a percentage of annual income. However, this limit may be imposed in one of a few different ways. You employer may elect to match 100% of your contributions, up to a percentage of your total compensation, or to match a percentage of contributions up to the limit. Although the total limit on employer contributions remains the same, the second situation requires you to contribute more to your plan to get the maximum match possible.

Some companies match up to a certain dollar amount, regardless of income. This limits their liability to highly compensated employees.

A partial matching scheme with an upper limit is common. If your employer matches 50% of your contributions that equal up to 6% of your annual salary, and you earn $60,000, the contributions equal to 6% of your salary, or $3,600, are eligible for matching. However, your employer only matches 50%, so the total matching benefit is capped at $1,800. Under this formula, you must contribute twice as much to your retirement to reap the full benefit of employer matching. However, if your employer matches a certain dollar amount, you have to contribute that amount to maximize benefits, regardless of what percentage of your annual income it may represent.

All deferrals are subject to an annual contribution limit dictated by the IRS. For employers in 2019, the total contributions to all 401(k) accounts held by the same employee (regardless of current employment status) is $56,000, or 100% of compensation, whichever is less. However, elective salary deferrals made by employees are limited to $19,000. Thus, an employee can contribute up to the annual salary deferral limit to their 401(k) each year, and an employer may contribute up to the IRS annual limit via match or additional compensation. The sum your employer matches doesn’t count toward your annual salary deferral limit.

The IRS also allows those over age 50 to make additional “catch-up” contributions to motivate employees close to retirement to ramp up their savings. For 2019, the annual catch-up contribution limit is $6,000.

In addition to reviewing your 401(k) plan’s matching requirements, learn about your plan’s vesting. This dictates the degree of ownership you have in employer contributions, based on the number of years of with the company. Even if your employer has a generous match, you may forfeit some or all of those contributions, if your employment is terminated (either voluntarily or involuntarily) prior to a certain number of years has elapsed. However, all contributions you make to your retirement savings account are 100% vested at all times and can’t be forfeited.

Reference: Investopedia (February 4, 2019) “How 401(k) Matching Works”

Suggested Key Terms: 401(k), Vesting, Retirement, Employer Matching, Catch-Up Contributions