How Does 401(k) Match Work?

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how does 401(k) match work

Companies often sponsor 401(k) retirement plans to help employees save toward retirement. These retirement plans grow over time as employees make contributions. Some employers make matching contributions as an added benefit. Matching 401(k) contributions can increase your savings over time. So, how does 401(k) match work?

What is a 401(k) match?

With a 401(k) match, employers contribute a certain amount to a workplace retirement plan based on the employee’s contributions. A 401(k) match is an optional incentive employers can use to attract and retain employees.

Types of 401(k) matching contributions

The employee must contribute to their retirement account to benefit from an employer 401(k) match. Employers use different methods when making 401(k) matching contributions to an employee’s retirement account.

1. Partial matching

With a partial 401(k) match, the employer’s contributions are a fraction of an employee’s contribution to their retirement. Formulas can vary; however, a popular calculation used by employers is contributing 50 cents on the dollar for the first 6% of your earnings.

Employers may adopt a multilevel approach to calculate your 401(k) match using different salary rates. For example, an employer’s multi-tier formula could be a dollar match for every dollar you contribute up to 3% of your salary and 50 cents for every dollar contributed for the next 2% of your pay.   

2. Dollar-for-dollar matching 

Some employers match an employee’s 401(k) contributions, usually capped by a percentage of what you make. Under a dollar-for-dollar scenario, an employer may match 100% of your contributions up to 3% of your salary.  

Understanding how 401(k) matching works

An employer match is like free money. You need to understand your employer’s calculations to get the greatest benefit from a 401(k) match.

Under the partial match scenario above, the employer matches 50 cents for every dollar you contribute up to 6% of your earnings. Assume you make $50,000 annually and contribute 6% of your salary, or $3,000. Your employer matches 50 cents for every dollar you contribute or $1,500.

If your employer contributes dollar-for-dollar up to 6% of your salary, the 401(k) match is much higher. So, if you make $50,000 and contribute 6% of your salary, your annual contribution is $3,000. Since your contribution equals the 6% cap of the dollar-for-dollar match, your employer also contributes $3,000 to your retirement plan.

Remember that your 401(k) match will be less if you contribute a lower percentage.

How much can you contribute to 401(k) match?

The IRS limits the amount contributed to a 401(k) plan.

1. Employee and employer combined

The IRS imposes a contribution limit of $66,000 from both employers and employees. When you are 50 years or older, the IRS lets you make catch-up contributions of $7,500, bringing your max to $73,500.

2. Employee alone

For 2023, employees can contribute up to $22,500 to their 401(k) plan. Employees 50 years or older can make an extra catch-up contribution of $7,500 for 2023. The employer match does not factor into the employee’s maximum contribution. 

Remember that the maximum employee contribution applies to all 401(k) plans you have. So, if you have more than one 401(k) plan, change jobs during the year or receive a substantial raise, be sure the total contribution across all plans falls under the IRS limit for the year. You could be hit with extra income tax if you exceed the contribution limit.

What are 401(k) vesting schedules?

A vesting period is when an employee must work to earn the benefits given by the company. When your 401(k) plan has a five-year vesting schedule, you may not immediately own any employer matches made to your retirement plan. Instead, employees earn them over time.

With graded vesting, you earn a portion of your benefits over time. If your plan has a five-year vesting period, you make 20% of your benefits yearly.

Alternatively, you earn benefits after you reach a set period with cliff vesting. When your 401(k) plan follows a cliff vesting cycle, you wait five years before earning the employer match.

If your employment terminates before the end of the vesting period, you lose the remaining benefits. However, the money you contribute to the plan is yours even if you leave the company.

Grow your retirement savings with a 401(k) match

A 401(k) match is an effortless way to grow your retirement savings. In addition to your regular contributions, a 401(k) match builds up your retirement account. Best of all, you don’t have to do anything more than contribute to your retirement savings to take advantage of this valuable benefit.


Do all employers offer 401(k) matching?

Employers often use 401(k) matching as a benefit to their employees. However, not every employer offers 401(k) matching.

Can your employer stop matching contributions?

Employers can stop matching contributions at their discretion. Depending on the type of retirement, an employer may be required to give employees 30 days’ notice if they suspend contributions. 

What happens to your 401(k) if you leave your job?

When you leave your job, you can roll the balance of your 401(k) into your new employer’s plan, leave the funds in your existing 401(k) plan or roll the funds into an IRA. You can also withdraw the money when you leave your job; however, you should expect to pay federal income tax on the distribution and a possible early withdrawal penalty of 10%. 

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