The Ultimate Guide to the 401K Employer Match [No More Confusion]

what is a 401k matchThe 401K match can be a confusing benefit to understand. You know you are getting money added into your account yet you don’t quite understand all the rules.

As a business owner you need to understand what a company match is, and how to decide if it is a benefit you want to offer.

In this guide we cover the basics of what a 401K match is. Plus we review what a business owner should consider when deciding if they want to offer a match.

401K Employer Match Guidelines:

A company is not required to provide a match for the employees. Yet this is a great way to add a benefit that employees would like. Once a company starts a match it does not have to remain. If the company needs to reduce expenses they can adjust the match amount or even drop the match. They do have to give you notice and change all the plan documents, but once a match is set it is not permanent.

The only exception to the contribution being optional is if the company uses a safe harbor 401k. Then it is mandatory for the company to contribute either as a match or as a part of your salary.

How Your Match is Calculated:

There are many ways for a company to determine how much to match.  Two common types are:

  • Match a percentage of employee contribution up to a certain limit. For example: match 50% of the first 6% of salary that an employee contributes. (This is one of the most common matches). Example: If you made $1,250 twice a month and contributed 10% ($125) into your 401K. Then the company would also add $37.50 per paycheck for a total of $900 a year.
  • The company will match dollar for dollar up to a certain limit. For example: Match 100% of employee’s contribution up to 7%. Using the numbers from above the company would match $87.50 per paycheck for a total of $2,100 a year.

To find out what your company does look at your plan documents to see what they will match. While you can ask your HR, or boss it is better to go to the plan documents and read exactly what the plan is set up to match. This way there is no confusion when you are deciding how much to invest.

Want to know exactly how much your match would be? Check out this calculator.  Employer 401K Match Calculator

Where is the Employer Match Money Invested?

Every company determines where they are going to invest the match funds.  Make sure you know where that money gets invested and if you can move it to another fund after it has contributed.

Most companies simply match where your own contribution are going. Some will put it in company stock. You will also find this information in the plan documents.

Vesting Schedule of Matched Funds:

Most plans don’t allow you to keep the matched funds right away if you should leave the company.

Instead the contribution is vested over a certain number of years.  Once that time has been reached then you gain 100% control over the investment.

An example of this might be that your company plan has a five year vesting schedule. This means that after five years you could leave the company and get the entire match.  If you were to leave in two years, you may only get 40% of the match.

Again, safe harbor 401K’s are a bit different and you might vest immediately.You can read more about vesting here: What is vesting.

Profit Sharing:

Besides matching what you put in, companies can contribute more in the form of profit sharing.

This is determined on a year by year basis by the company.  So if your company has a great year they may contribute more into your 401K as a way of sharing the profits.

This is not calculated based on how much you contribute into the 401K. Instead it is calculated on your salary and the profits of the company.

The 401K employer match is a great way to increase the amount of money you are saving and gain extra “income”.  Make sure you are contributing at least the minimum to take advantage of the company match.

For the Business Owner

Do you run your own business? Not sure if you should offer a match on your 401K?  Here are some things to consider.

  1. If you have a Safe Harbor Plan then you have to either match or contribute for everyone. This is the rule to be able to waive all the income testing requirements.
  2. Can you consistently provide this as a benefit? The last thing you want to do is add a benefit that you can’t maintain. Taking the match away can cause morale problems. Make sure you want it to stay around for good.
  3. A great way to recruit and keep the talent you need. Employees are looking for companies that offer more than just a salary. Adding a 401K with a match can help you find great employees and keep them!
  4. Tax deduction – your matching contribution is a deductible expense on the business. Thus you get to lower your taxable business income.
  5. It helps you save more for retirement! Being a small business owner means sometimes it is hard to save for retirement. Yet when you add a 401K you can start to save, and with a match you can contribute even more!


1 comment
Roger @ The Chicago Financial Planner says November 20, 2012

Excellent post Andrea, a very clear and concise explanation of this important (and sometimes confusing) topic.

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