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  • Writer's pictureAntonio Buchanan

"How 401K Matching Works"

Employer matching of your 401(k) contributions simply means that your employer contributes a certain amount to your retirement savings plan based on the amount of your own annual contribution.

Depending on the terms of your employer's 401(k) plan, your contributions to your retirement savings may be matched by employer contributions in a number of ways.

Typically, employers match a percentage of employee contributions, up to a certain portion of total salary. Occasionally, employers may elect to match employee contributions up to a certain dollar amount, regardless of employee compensation.

When Does an Employer Match Contributions?

The specific terms of 401(k) plans vary widely. Other than the necessity to adhere to certain required contribution limits and withdrawal regulations dictated by the

Employee Retirement Income Security Act (ERISA), the sponsoring employer determines the specific terms of each 401(k) plan. Your employer may elect to use a very generous matching algorithm or choose not to match employee contributions at all. Some 401(k) plans may offer far more generous matches than others (some may not offer a match at all). Whatever the match is, it amounts to free money added to your retirement savings, so it is best not to leave it on the table.

Refer to the terms of your plan to verify if and when your employer makes matching contributions. Not all employer contributions to employee 401(k) plans are the result of matching. Employers may elect to make regular deferrals to employee plans regardless of employee contributions, though it is not particularly common.

Employer Matching Formulas

Most often, employers 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. Though the total limit on employer contributions remains the same, the latter scenario requires you to contribute more to your plan to receive the maximum possible match.

Some employers may match up to a certain dollar amount, regardless of income, limiting their liability to highly compensated employees. For example, an employer may elect to match only the first $5,000 of your employee contributions.

"Your employer could match 100% or even a dollar amount based upon some formula, but this can get expensive and normally owners want their employees to take some ownership of their retirement while still providing an incentive," says Dan Stewart, CFA®, president, Revere Asset Management, Inc., in Dallas.

How the Match Works

Assume your employer offers a 100% match on all your contributions each year, up to a maximum of 3% of your annual income. If you earn $60,000, the maximum amount your employer contributes each year is $1,800. To maximize this benefit, you must also contribute $1,800. If you contribute more than 3% of your salary, the additional contributions are unmatched. If you contribute $5,000 in a single year, your employer maxes out the matching requirement, giving you a total contribution of $6,800.

A partial matching scheme with an upper limit is more common. Assume that your employer matches 50% of your contributions that equal up to 6% of your annual salary. If 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%, meaning the total matching benefit is still capped at $1,800. Under this formula, you must contribute twice as much to your retirement to reap the full benefit of employer matching.

If your employer matches a certain dollar amount, as in the example above, you must contribute that amount to maximize benefits, regardless of what percentage of your annual income it may represent.

Contribution Limits

Regardless of whether contributions to your 401(k) come from you or from employer matching, all deferrals are subject to an annual contribution limit dictated by the Internal Revenue Service (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.

In short, a saver may contribute up to the annual salary deferral limit to their 401(k) each year ($19,000 in 2019, $18,500 in 2018) and an employer may contribute up to the IRS annual limit ($56,000 in 2019, $55,000 in 2018) via match or additional compensation. To be clear, the sum your employer matches does not count toward your annual salary deferral limit. Keep in mind that these limits maybe updated every year, usually in October or November.

In addition, the IRS allows those over 50 to make additional catch-up contributions designed to encourage employees nearing retirement to bulk up their savings. For 2019, the annual catch-up contribution limit is $6,000, unchanged from 2018.


In addition to reviewing your 401(k) plan's matching requirements, educate yourself about your plan's vesting schedule.

A vesting schedule dictates the degree of ownership you have in employer contributions based on the number of years of your employment. Even if your employer has a very generous matching scheme, you may forfeit some or all of those contributions if your employment is terminated – either voluntarily or involuntarily – before a certain number of years has elapsed.

"A typical schedule gives an employee a percentage of ownership that steadily increases in lock-step with the employee’s tenure. According to the Bureau of Labor Statistics, the average numbers of years to be fully vested is five, according to Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of "The 12-Step Recovery Program for Active Investors."

Any contributions you make to your retirement savings account are 100% vested at all times and cannot be forfeited.


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