401(k) Matching: What It Is and How It Works (2023)

  • 401(k) employer matching is the process through which an employer matches an employee’s contributions to their 401(k) retirement account.
  • 401(k) employer matches can improve employee morale and retention, attract better hires, and provide tax benefits to your company.
  • When offering 401(k) matching, you should set employer match contribution limits, review the IRS’ contribution limits and include vesting provisions.
  • This article is for business owners and employers interested in 401(k) matching.

Retirement plans are among the benefits employers most commonly offer their employees. Some employers take their retirement offerings a step further by offering 401(k) employer matching, which incentivizes employees to participate in the company’s 401(k) plan by adding money into their retirement savings based on how much they contribute each pay period.

If you’re thinking about opening retirement accounts for your team, want to improve your existing 401(k) options, or are in need of a new 401(k) plan for a startup, you should consider setting up a 401(k) employer match. Before doing so, though, you need a clear understanding of what 401(k) employer matching is, what the benefits are and how you should operate your matching program.

Editor’s note: Looking for the right employee retirement plan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is 401(k) employer matching?

401(k) employer matching is the process by which an employer contributes to an employee’s retirement account based on the employee’s contributions. Employers tend to set their 401(k) contribution limits based on the employee’s annual salary. In other words, an employer’s contribution rate may be at most a certain percentage of the employee’s salary. For example, an employer may be willing to match 50% of an employee’s contribution, up to 6% of their annual salary. So, if the employee contributed 6% to their 401(k) plan, the employer would contribute an additional 3% to the employee’s retirement savings.

Rarely, some employers instead set a contribution limit of a predetermined dollar amount that’s unrelated to the employee’s annual salary. In either case, these contributions are typically made per pay period and reflected on the employee’s paycheck.

(Video) 401k Company Matching Explained

401(k) Matching: What It Is and How It Works (1)Key takeaway: 401(k) employer matching is when an employer also contributes to an employee’s retirement account based on the amount the employee contributes.

Why should you offer a 401(k) employer match?

Offering a 401(k) employer match as part of your small business 401(k) plan has three primary benefits for your company:

  • Better recruiting: Not all companies offer a 401(k) employer match, so doing so can help your business stand out to top job candidates. Providing better benefits correlates with hiring better employees.
  • Stronger employee morale and retention: Just as offering 401(k) contribution matching can draw better recruits to your business, this benefit can also improve morale among existing team members and increase employee retention at your company.
  • Employer tax benefits: There are tax savings that businesses can take advantage of by offering 401(k) employer matching. Tax laws allow employers to claim their matching contributions as tax deductions.

Learn more about how small businesses benefit from 401(k) plans.

401(k) Matching: What It Is and How It Works (2)Tip: Retirement savings plans are often considered a key part of a great employee benefits package. Whether they are a taxable fringe benefit depends on whether the plan is tax-deferred.

Is offering a 401(k) employer match mandatory?

Although offering a 401(k) employer match for employees’ retirement plans may benefit your business, there are no laws requiring employer matching. However, if you do offer a 401(k) employer match contribution program, you are legally required to conduct nondiscrimination testing to ensure your program equally benefits all of your employees. These IRS-created tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, ensure that your company’s most highly paid employees benefit as much from tax-deferred contributions as your other employees.

(Video) How Does a 401(k) Plan Work?

Also, even though it’s not mandatory, the best employee retirement plans typically include matching as part of the retirement fund package. A certified financial advisor can walk employers through the legalities of 401(k) matching and the different components of 401(k) programs.

Did you know? Some payroll companies also operate 401(k) plans. See our review of ADP for one such example.

How does 401(k) matching work?

401(k) matching works by depositing an employer contribution amount into an employee’s 401(k) account. For your 401(K) matching program to succeed, you need to address the following questions.

How much should you match 401(k) contributions?

Employers’ 401(k) match amounts vary widely. However, all contribution limits and withdrawal regulations must comply with the standards of the Employee Retirement Income Security Act. Otherwise, you can set your 401(k) contribution rates however you please.

There are two especially common methods for determining how much money you should contribute to your employees’ retirement accounts:

(Video) How Much Do I Contribute to My 401(k) If There’s a Match?

  • As a percentage of an employee’s wages: Some employers will match all employee contributions up to a contribution limit equal to a percentage of an employee’s wages. For example, if you set a contribution limit of 4% of an employee’s income and the employee makes $50,000 per year, you will contribute at most $2,000 (0.04 x $50,000 = $2,000) over the course of the plan year. Note that if your employee contributes less than $2,000 to their retirement account, you have to match only that amount, not the full $2,000.
  • As a percentage of an employee’s contributions: Other employers will match a percentage of contributions instead. For example, if you choose to match 40% of your employees’ contributions with the same 4% contribution limit as in the prior scenario, then for an employee with a $50,000 annual salary, your employer contribution limit isn’t $2,000 over the course of the plan year. Instead, it’s $800 (0.4 x $2,000 = $800).

401(k) Matching: What It Is and How It Works (3)Did you know?: Self-employed 401(k) plans may not offer employer matching, but they still allow independent contractors and sole proprietors to save for their retirement.

What is the maximum amount you can contribute to 401(k) plans?

When determining how much money you should contribute to an employee’s retirement account, you should also consider the annual contribution limits that the IRS sets for both you and your employee. For 2022, the limit on elective salary deferrals – retirement plan contributions an employee voluntarily makes – is $20,500 for a traditional 401(k) plan. For a SIMPLE 401(k) plan, this limit is lowered to $14,000. Employees age 50 and older can contribute an additional $6,500 in elective salary deferrals to a traditional 401(k) plan or $3,000 to a SIMPLE 401(k) plan.

The total contribution limit a person can make to an employer-sponsored retirement account during a year is the sum of elective salary deferrals, employer contributions and allocations of forfeitures. For 2022, the total contribution limit is $61,000; for an employee with an annual income below $61,000, the limit is whatever their income is. Notably, if an employee has a retirement account with your company and a separate 401(k) they contribute to through side income they generate as an independent contractor, that separate account is unaffected by the limits on the employer-sponsored account.

How does 401(k) vesting relate to your 401(k) matching program?

As an employer, you can take ownership of part or all of your employer match contributions through a practice known as vesting. The legal definition of “vesting” is the right to ownership over a future payment, benefit or asset. When applied to retirement accounts, vesting describes the process of employees earning greater rights to access their employer contributions as time passes. That’s why the vesting schedule you set for your 401(k) employer match is a crucial component of your program.

401(k) Matching: What It Is and How It Works (4)Tip: If you’re considering borrowing from your 401(k), keep in mind you can only borrow against the vested amount of your employer match, not the gross total that includes the non-vested matching funds.

(Video) How Do I Calculate My Employer 401K Match?

Your vesting schedule can incentivize employees to stay with your company longer because the longer your employees stay with you, the more their nonforfeitable rights to your employer contributions grow. After a set number of years, your employee can leave your company while taking all of your employer matching contributions with them, but employees who leave too soon may forfeit some or all of your employer matching contributions.

Alternatively, offering immediate vesting is an appealing benefit for employees too. They’ll have the comfort and security of knowing that should they leave your company for any reason at any time, their 401(k) funds are going with them regardless of how long they’ve been employed with you. This option is likely to make your business more attractive to new hires.

401(k) Matching: What It Is and How It Works (5)Key takeaway: To figure out how your 401(k) matching process will work, determine your employer match contribution limits, familiarize yourself with the IRS-mandated 401(k) contribution limits and determine a vesting schedule that drives employee retention while minimizing your financial risk.

401(k) matching makes financial sense

401(k) matching makes financial sense for employers and employees alike. Employee matching is the best way for employees to maximize their retirement savings, while employers get the benefits that come with investing in their team members’ futures – namely, tax savings and reduced employee turnover. Learn more about employee retirement plans and their features in our buyer’s guide.

Kimberlee Leonard contributed to the writing and reporting in this article.

(Video) How 401k Match Works

FAQs

How does 401k match WORK example? ›

For example, your employer may pay $0.50 for every $1 you contribute up to 6% of your salary. So if you make $50,000 per year, 6% of your salary is $3,000. If you contribute that much to your 401(k), your employer contributes half the amount -- $1,500 of free money -- as a match.

What does 6% 401k match mean? ›

The most common partial match provided by employers is 50% of what you put in, up to 6% of your salary. In other words, your employer matches half of whatever you contribute … but no more than 3% of your salary total. To get the maximum amount of match, you have to put in 6% of your salary.

Is 401k matching worth it? ›

The employer matching contribution that is part of many 401(k) plans is an attractive benefit. In some cases, it is equivalent to your employer guaranteeing a 100% return on your investment. However, it's not the only advantage that 401(k) plans have to offer.

How is 401k matching calculated? ›

For example, let's assume your employer provides a 50% match on the first 6% of your annual salary that you contribute to your 401(k). If you have an annual salary of $100,000 and contribute 6%, your contribution will be $6,000 and your employer's 50% match will be $3,000 ($6,000 x 50%), for a total of $9,000.

What does 5% 401k matching mean? ›

Your employer might agree to match 100% of your 401(k) contributions up to 5% of your paycheck. So, if your paycheck were $1,000, the employer would match your contribution dollar for dollar, up to $50.

Is 6% a good match for 401k? ›

The Bottom Line

The most common employer match is dollar for dollar of up to 6% of your salary³. Most financial advisors recommend contributing at least enough to get the maximum employer 401K match. But more is always better to help save the most for retirement.

Is 7% a good 401K match? ›

The Bottom Line

Many employers match as much as 50 cents on the dollar, on up to 6% of your salary. Most advisors recommend contributing enough to get the maximum match. Turning down free money doesn't make sense unless the fund is so bad that you're losing most of it to fees and substandard returns.

Is 5% 401K a lot? ›

However, regardless of your age and expectations, most financial advisors agree that 10% to 20% of your salary is a good amount to contribute toward your retirement fund.

How much percent should I put in my 401K? ›

For that reason, many experts recommend investing 10-15 percent of your annual salary in a retirement savings vehicle like a 401(k).

Can an employer take back their 401K match? ›

Your employer may take your 401(k) money if you quit your job before the money is fully vested. If your employer has a vesting schedule, and you quit your job before you have satisfied the vesting schedule, your employer may take the unvested portion of the 401(k) match.

What do employers get out of matching 401K? ›

401(k) matching makes financial sense for employers and employees alike. Employee matching is the best way for employees to maximize their retirement savings, while employers get the benefits that come with investing in their team members' futures – namely, tax savings and reduced employee turnover.

What does 3% 401K match mean? ›

Imagine you earn $60,000 a year and contribute $1,800 annually to your 401(k)—or 3% of your income. If your employer offers a dollar-for-dollar match up to 3% of your salary, they would add an amount equal to 100% of your 401(k) contributions, raising your total annual contributions to $3,600.

How much will my 401k grow if I stop contributing? ›

There are a few points that one must remember when they stop contributing to their 401k plan or transfer it to a new account. No funds in your retirement account mean no growth of the funds. Therefore, instead of withdrawing the funds, put them on another retirement plan.

Is 3% 401k match good? ›

While 3% was the norm at one time, 65% of plans are now using a default rate higher than 3% in order to significantly boost savings for participants over time. In 2022, the most common default rate is now 6% of pay, according to the Plan Council Sponsor of America.

What is a good 401k balance by age? ›

By age 40, you should have three times your annual salary already saved. By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary.

Is 500k 401k enough to retire? ›

The short answer is yes—$500,000 is sufficient for many retirees. The question is how that will work out for you. With an income source like Social Security, relatively low spending, and a bit of good luck, this is feasible.

How much 401k should you have at 55? ›

According to these parameters, you may need 10 to 12 times your current annual salary saved by the time you retire. Experts say to have at least seven times your salary saved at age 55. That means if you make $55,000 a year, you should have at least $385,000 saved for retirement.

Is 6% 401K too much? ›

Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2022 is $20,500 or $27,000 if you are 50 or older.

What is a healthy 401K balance? ›

If your employer offers a 401k and you are not utilizing it, you may be leaving money on the table – especially if your employer matches your contributions.
...
Average 401k by Age (Vanguard)
AGEAVERAGE 401K BALANCEMEDIAN 401K BALANCE
<25$6,718$2,240
25-34$33,272$13,265
35-44$86,582$32,664
45-54$161,079$56,722
2 more rows
7 Sept 2022

Is 15% in 401K enough? ›

But how much is enough? Our guideline: Aim to save at least 15% of your pre-tax income1 each year, which includes any employer match. That's assuming you save for retirement from age 25 to age 67.

Is $500 a month to 401k good? ›

Most experts recommend putting at least 10% to 15% of your income toward your retirement fund, so $500 per month is right on target according to this guideline. However, whether $500 per month will make you a millionaire will depend on when you started saving.

Can you put 100% of your salary in 401k? ›

For 2022, your total 401(k) contributions — from yourself and your employer — cannot exceed $61,000 or 100% of your compensation, whichever is less. For 2023, that number is $66,000 or 100% of your compensation. Employers who match employees' 401(k) contributions often do so between 3% and 6% of the employee's salary.

How much should I put in my 401k each month? ›

If you're wondering how much you should put in your 401(k), one good rule of thumb is 15% of your pretax income, including your employer's match.

How much will a 401k grow in 20 years? ›

You would build a 401(k) balance of $263,697 by the end of the 20-year time frame. Modifying some of the inputs even a little bit can demonstrate the big impact that comes with small changes. If you start with just a $5,000 balance instead of $0, the account balance grows to $283,891.

How much should I put in my 401k each week? ›

“Ideally, if you have a 401(k), you should contribute 15-20 percent of your gross income into it. However, Millennials are contributing about 7.3 percent of their paychecks to retirement savings plans, according to Fidelity.

How much does 401k take from paycheck? ›

Financial experts generally recommend that everyone contribute 10% of their paycheck to a 401(k), but this may not be doable for all. Plus, often times we think about other ways we'll need to use that money now.

Do I lose my 401k if I quit? ›

Your employer gets to take back any unvested contributions. If there was no vesting schedule — in other words, if 100% of employer contributions vested immediately — then it's all yours. (Of course, any money you put in yourself is always yours either way.)

Do I lose my 401k match if I quit? ›

With a 401(k) match, you will be able to keep the amount you contributed only if the money had been completely vested before your quit. Otherwise, it will end up with the former employer taking back all the unvested contributions. Fortunately, the money you contributed yourself will still belong to you no matter what.

Do you lose your 401k if you get fired? ›

If you are fired, you lose your right to any remaining unvested funds (employer contributions) in your 401(k). You are always completely vested in your contributions and can not lose this portion of your 401(k).

What are three disadvantages of 401k accounts? ›

Some of the common disadvantages of 401(k)s include:
  • A small or nonexistent company match.
  • High fees associated with the account.
  • Few investment opportunities for your funds.
  • A wait until you can keep company contributions.
  • Difficulty accessing funds early.
  • Tax implications for withdrawals.
15 Sept 2021

How long do you have to stay with a company to keep 401k match? ›

Vesting schedules — the length of time you must be at an employer for its 401(k) matching contributions to be 100% yours — can be up to six years.

What company has best 401k match? ›

The average employer contribution match was 4.5% in 2020, and the median match was 4.0%, according to a Vanguard study. Major companies that provide some of the biggest matches include ConocoPhillips, Philip Morris International, and Amgen.

Should I put more than the match in my 401k? ›

If you have a 401(k) at work and your employer offers a match, you should always invest enough in the 401(k) to claim the full match. If you don't, you're giving up free money. You can't afford to give up free money and should take advantage of the help your employer provides to ensure you save enough for retirement.

Is a Roth IRA or 401k better? ›

The Bottom Line. In many cases, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.

Does 401k double every 10 years? ›

“The longer you can stay invested in something, the more opportunity you have for that investment to appreciate,” he said. Assuming a 7 percent average annual return, it will take a little more than 10 years for a $60,000 401k balance to compound so it doubles in size. Learn the basics of how compound interest works.

How much should I have in my 401k at 45? ›

By age 45: Have four times your salary saved. By age 50: Have six times your salary saved. By age 55: Have seven times your salary saved. By age 60: Have eight times your salary saved.

Is 5% a good 401K match? ›

The Bottom Line

Many employers match as much as 50 cents on the dollar, on up to 6% of your salary. Most advisors recommend contributing enough to get the maximum match. Turning down free money doesn't make sense unless the fund is so bad that you're losing most of it to fees and substandard returns.

What percentage should I contribute to my 401K per paycheck? ›

However, regardless of your age and expectations, most financial advisors agree that 10% to 20% of your salary is a good amount to contribute toward your retirement fund.

What is typical employer matching for 401K? ›

According to the Bureau of Labor Statistics, the typical or average 401K match nets out to 3.5%. Their National Compensation Survey found that of the 56% of employers who offer a 401K plan (a sad statistic in itself): 49% of employers with 401K plans match 0%

What percentage should I contribute to my 401K? ›

For that reason, many experts recommend investing 10-15 percent of your annual salary in a retirement savings vehicle like a 401(k).

Is 6% 401k too much? ›

Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2022 is $20,500 or $27,000 if you are 50 or older.

Is 3% enough for 401k? ›

Aim to Save More Than 10%

But when a savings rate is suggested, it's often 10% or more. "Our rule of thumb is to save 15% annually at any point throughout your career, and that includes any contribution your employer might make," says Meghan Murphy, a vice president at Fidelity Investments.

What happens to 401k when you quit? ›

Key Takeaways. If you change companies, you can roll over your 401(k) into your new employer's plan, if the new company has one. Another option is to roll over your 401(k) into an individual retirement account (IRA). You can also leave your 401(k) with your former employer if your account balance isn't too small.

What is a good 401k match? ›

The most common Safe Harbor 401(k) matching formulas are: 100% match on the first 3% of employee contributions, plus 50% match on the next 3-5% (Basic match) 100% match on the first 4-6% of employee contributions (Enhanced match) At least 3% of employee pay, regardless of employee deferrals (Nonelective contribution)

What does 3% 401k match mean? ›

Imagine you earn $60,000 a year and contribute $1,800 annually to your 401(k)—or 3% of your income. If your employer offers a dollar-for-dollar match up to 3% of your salary, they would add an amount equal to 100% of your 401(k) contributions, raising your total annual contributions to $3,600.

Can an employer take back their 401k match? ›

Your employer may take your 401(k) money if you quit your job before the money is fully vested. If your employer has a vesting schedule, and you quit your job before you have satisfied the vesting schedule, your employer may take the unvested portion of the 401(k) match.

What is the highest percentage a employer can match a 401k? ›

Typically, a 401(k) plan may offer an employer match of 50 cents on the dollar, up to 6 percent of a worker's salary, which would be the equivalent of 3 percent of compensation.

How much should I put in my 401K each month? ›

If you're wondering how much you should put in your 401(k), one good rule of thumb is 15% of your pretax income, including your employer's match.

How much does 401K take from paycheck? ›

Financial experts generally recommend that everyone contribute 10% of their paycheck to a 401(k), but this may not be doable for all. Plus, often times we think about other ways we'll need to use that money now.

Can I contribute 100% of my salary to my 401K? ›

For 2022, your total 401(k) contributions — from yourself and your employer — cannot exceed $61,000 or 100% of your compensation, whichever is less. For 2023, that number is $66,000 or 100% of your compensation. Employers who match employees' 401(k) contributions often do so between 3% and 6% of the employee's salary.

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