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What is a 401K Employer Match

401k employer match

Get Extra Money From Your Employer!

 

If you are blessed enough to have a 401k at your company then you might also be blessed enough to have a 401k match.  A 401K match is when your company will contribute extra money to your account based on what you invested.  (Not lucky enough to have a 401K read: How to Create Your Own 401K)

401K Employer Match Guidelines:

A company is not required to provide a match for the employees.  However this is seen as a way to provide extra benefits to employees, so many companies offer the 401k company match as a perk.  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 eliminate the match.  They do have to give you notice and change all of the plan documents, but once a match is set it is not permanent.

The only exception to this is if the company opts to have a safe harbor 401k, then it is mandatory for them to contribute either as a match or as a portion of your salary.

How much is matched:

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

  • Match 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).  Thus 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.

If you need help translating the 401k language into actual dollar amounts, 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 been invested.  Some companies will just put the match directly into where you are allocating your investments and some will put it in company stock.  You will also find this information in the plan documents.  Knowing this information will help you understand if you will be diversified or if there are extra strings attached to the matched funds.

Vesting Schedule of Matched Funds:

Most companies when they match your contribution don’t allow you to take full ownership of the match immediately.  Instead it is vested over a certain number of years.  Once that requirement has been reached then you gain 100% control over the investment.  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:

In addition to matching what you put in, companies are allowed to contribute profit sharing to your 401K.  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 typically will not have anything to do with how much you contribute into the 401K, but instead is based 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.

Your Turn – Informal Poll: Do you have a company match?  If so how much does it match?

Image Courtesy of PTMoney.com

 

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Comments

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