About 401(k) Employer Contributions

Those matching contributions add up fast.
Image Credit: ohmygouche/iStock/Getty Images

Employer matching contributions are one of the best things about 401(k) plans. When your employer adds a percentage of your own salary deferrals to your account, the account grows faster, especially if the funds are put into high-quality investments. Companies aren't required to match your contributions to your 401(k); it's entirely voluntary. If you work for a company that does match, it usually makes sense to max out your own contributions. Otherwise, you're effectively missing out on free money.

Matching Formula

Companies usually use a formula to determine the amount of their contributions to your account, rather than matching dollar for dollar. For example, the employer may match 50 percent of your contributions up to a limit of 6 percent of your salary. That works out to be a maximum of 3 percent of your salary in a year. If you contribute less than 6 percent of your salary yourself, it will be less; if you contribute more than 6 percent, the company match will still be 3 percent.

Limits

The Internal Revenue Service limits the amount of tax-deferred contributions you can make to a 401(k) in a year. As of publication, the limit is $17,500, plus $5,500 in catch-up contributions for people ages 50 and over. In addition, employers sometimes set limits on how much of your salary you can defer; the amount is up to the employer. Depending on how generous your employer is, the company match can really add up. If you're 35, for example, and you work for a company that matches your contributions by 50 percent with no company-imposed limits, contribute the maximum $17,500 and your employer will kick in another $8,750. As of publication, the IRS limits combined employer and employee contributions to $52,000, and there may be additional limits if you're considered a highly compensated employee.

Vesting

Vesting is a process that entitles you to ownership of the funds in your account over time. You're always 100 percent vested in whatever you've put into your account yourself, but employer contributions may be on a schedule determined by how long you've worked for the company. For example, you may become vested in 25 percent of matching contributions after one year, 50 percent after two years, 75 percent after three years and 100 percent after four years. That means that if you leave the company after three years, you'll take with you only three-quarters of the matching funds.

Enrollment

To increase participation in their 401(k) plans, companies often enroll employees automatically, with levels of contributions and investment funds chosen by the employer. To make the most of your 401(k) employer match, do the math and make your choices yourself.

references