What Are Matching Contributions From An Employer?

What are matching contributions from an employer? The basic premise of the 401k plan is surprisingly simple and effective - the employee contributes a certain amount or percentage from his or her paycheck each pay period, and the employer literally matches this with a similar amount.

The basic premise of the 401k plan is surprisingly simple and effective - the employee contributes a certain amount or percentage from his or her paycheck each pay period, and the employer literally matches this with a similar amount. If you are lucky enough to have an employer that gives a 100% match, you give $20 from your check each week; your employee contributes the same amount. Of course, the more you can afford, the more your company will match you and it always pays to contribute the maximum you can. Investment analyst Paul DLouhy says "Only around 60% of those who do contribute to a 401k plan, contribute the maximum" And of course, the earlier you start to save, the more money you will have upon retirement.


From an employer point of view, it is worth offering matching contributions for two reasons - the timeline of vesting (meaning the employer has been employed a certain length of time) acts as an effective way of keeping employees and matching contributions are of course an excellent way to gain employee participation in the plan. Employers are not legally obliged to match employee contributions, and each company sets its own percentage for maximum employee contributions, which may not allow the employee to invest the maximum allowed by law.




Whereas most employers match the contributions from the employee, not all employers do. (See question 8) A recent survey by the Profit Sharing/401k Council of America found that around 78% of plans include some kind of employer matching contribution. And that figure does not include workers who do contribute to a 401k plan but don't contribute the minimum required to receive the entire employer match. On employer matches, DLouhy advises "Don't let the lack of matching contributions by your employer stop you from starting a 401k plan for your retirement - merely relying on an IRA is not enough"

A common policy is for an employer to contribute 50 cents for each dollar, up to the first 6% of salary the employer contributes. Therefore, if you earn $50,000 per year and contribute 6% of your salary ($3,000) you would then get the benefit of your employer matching $1500. The actual amount will vary as to your employer's particular policy.

The question of timing is important too, when it comes to matching contributions. Federal rules mean that an employer must make their matching contributions by the tax deadline for that particular year, but not necessarily at the same time the employee makes their contribution. Explains DLouhy "If you contribute everything in the first few months of the year and nothing later on, you may miss out on some matching contributions from your employer".

One good feature about the matching contributions is that it once a company offers matching contributions, it is rare for a company to eliminate their match altogether - even in times of economic hardship. So you may not be getting a bonus or a pay raise next year - but you can usually depend on your employer's matching contributions.

© High Speed Ventures 2011