What Is 401(k) Employer Matching?

Looking to improve employee retention and build company loyalty? Expanding your employer-sponsored 401(k) plan by adding an employer-matching option may do the trick. If you’re unsure if this is the right option for your company, we’re breaking down everything you need to know about employer matching to help bring you clarity.

What is employer matching?

A standard 401(k) retirement plan equips individuals with a smart retirement savings solution. Additionally, an employer matching option within this plan gives employers the power to match a percentage of the employees’ initial contribution. There are two ways in which employer-matching options can be offered.

Partial Matching

With partial matching, employers may choose to match a determined percentage of the employee contribution. The chosen percentage may vary from 2% to 50% of an employee’s contribution. For example, an employer might match 50% of an employee’s deferral up to 5% of their compensation.

It’s the employer who sets the limit to how much the employee is allowed to contribute before the matching stops.

Full Matching

Employers will match 100% of salary contributions made by employees (up to a certain percentage amount) with this option. For instance, if an employee contributes 3% of their income to their 401(k), their employer will match it with an additional 3% contribution. Like partial matching, the employer sets a limit to the employee contribution percentage. Once an employee has reached their matching limit, the employer will not contribute any more than the determined percentage matching amount.

What is a vesting schedule and how does it work?

Many employers offer a match based on a vesting schedule. That means the employee will take ownership of the employer’s contributions after a predetermined employment period. These time periods may vary depending on the employer but cannot exceed six years.

For instance, an employee may not take ownership of their employer-matching contributions until 2 years of employment. If an employee leaves the company before those matching funds are fully vested, they forfeit those unvested employer contributions.

With a vesting schedule in place, employees may be more likely to take their years of employment with the company into consideration before deciding to transition to another company.

How does a matching Roth contribution work?

Some employers offer a Roth 401(k) and a traditional 401(k) account. The difference between the two is that a Roth 401(k) is based on after-tax contributions whereas traditional 401(k) plans are based on pre-tax contributions. An employer may offer employer matching of a Roth 401(k) contribution, but it will be placed into a separate traditional 401(k) account for tax purposes, meaning it is taxable upon distribution.

Can an employer contribute to an employee’s 401(k) on their behalf?

Many employees hesitate to contribute to a 401(k) plan, usually due to their own financial instability. However, an employer does have the option to contribute to an employee’s 401(k) plan through a profit sharing contribution rather than a match. This typically occurs when it’s been a profitable year for the company.

What are the benefits of employer matching?

While some employees may weigh their options when it comes to enrolling in an employer-sponsored 401(k) plan, they may be more willing if the employer is offering an employer match option.

Employer matching may help to boost morale, inspire employees to produce their best work, and encourage the retention of top-tier talent. By providing an employer matching option, employers offer employees a chance to save even more for their retirement.

What’s more, employer matches may also be treated as a regular business expense and therefore, tax deductible. Note that these tax deductions are subject to certain limitations, as determined by the IRS.

If you’re wondering if it’s worthwhile to add employer matching to your company benefits, the answer is that it can be a beneficial choice for everyone involved. As an employer, you are free to set your own vesting schedule and matching limits while employees may feel more encouraged to remain loyal to your company.

This content is for educational purposes only, is not intended to provide specific legal or financial advice, and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.