How Does a 401(k) Match Work?

Imagine your salary is $80,000, but you have up to $15,000 for 401(k) matches. That means, in reality, that you have a salary of $95,000 — but only if you take advantage of it. Employer matching structures can vary. Some employers will match a percentage of your total contributions up to a certain amount of your total salary. Others will simply set a dollar limit on matched contributions, regardless of salary. Read on to learn how a 401(k) match works, so you don’t leave free money on the table.

What Is a 401(k) Employer Match? 

A 401(k) employer match is essentially an employer-sponsored benefit. Most mid-sized to large companies offer some form of retirement benefits or 401(k) matching. What is 401(k) matching? It means your employer will match a percentage of your 401(k) retirement account contributions. 

Matching 401(k)s vary by individual company. Usually, employers will contribute a certain amount to your 401(k) in addition to what you contribute, but sometimes they contribute based on company performance. 

As of 2023, you may contribute up to $22,500 to your 401(k). Your employer could elect to match 100% of your contributions up to the full amount or some percentage of your total contributions. If you don’t max out employer-matching contributions, you’re leaving free money on the table that could grow through investments to afford you a more comfortable retirement. 

For many people, using 401(k) matching is the first step in building a robust retirement portfolio. For example, suppose your employer offers a 100% 401(k) match up to $15,000. If you contribute $15,000 to your 401(k), you’re effectively adding $30,000 annually to your retirement account. If you do this for 25 years and invest that money in an indexed fund with an average 7% return, you’d have $1.8 million after 25 years. 

How Does 401(k) Matching Work? 

A 401(k) matching program is a common employer-sponsored retirement benefit. It allows employees to contribute a portion of their salaries to a tax-advantaged retirement account, known as a 401(k) plan. The employer may choose to match a percentage of the employee’s contributions up to a certain limit. 

Types of 401(k) Employer Matches

There are different structures for how employers choose to match 401(k) funds. Below are the most common options you may find. 

Fixed-Percentage Match

With a fixed-percentage match, the employer contributes a predetermined percentage of the employee’s salary to their 401(k) account. For example, a 50% match means the employer contributes 50% of the employee’s salary deferral up to a certain limit.

Dollar-for-Dollar Match

As the name implies, with a dollar-for-dollar match, the employer matches the employee’s salary deferral on a dollar-for-dollar basis up to a specified limit. For example, if the employee contributes $500, the employer also contributes $500.

Tiered Match

With a tiered match, the employer offers different matching percentages based on the employee’s contribution rate. Generally, you’ll get lower matching amounts as you contribute more. For example, the employer might offer a 50% match for the first 3% of your salary deferral and a 25% match for the next 2% of the salary deferral.

Discretionary Match

In discretionary match cases, the employer decides on a year-by-year basis whether or not to make company match 401(k) contributions. The discretionary match is not guaranteed and is subject to the employer’s discretion and financial circumstances. In this case, you’ll need to check with the company annually to ensure you max out match options. 

Profit-Sharing Match

Profit-sharing match options are designed to keep employees’ invested in a company’s success. Instead of directly matching the employee’s contributions with a profit-sharing match, employers make contributions to your 401(k) based on a percentage of the company’s profits or overall performance. This may be a set annual percentage or determined annually. With a profit-sharing match, your contributions aren’t usually linked to your employer’s contribution amount. 

Contribution Limits for 401(k) Matching in 2023

As of 2023, you’re allowed to contribute up to $22,500 to your 401(k) or $30,000 if you’re 50 or older. The total limit for annual contributions is $66,000, including employer-matched funds and any elected deferrals. That limit increases to $73,500 if you’re 50 or older.

The IRS has additional limits and criteria in the case of an automatic enrollment 401(k), including that an employee may choose not to contribute, but they must make an affirmative election not to do so. 

Employee Contribution Limits

As of 2023, the maximum any employee can contribute to a 401(k) is $22,500 for 2023. 

Employer Matching Percentage and Limits

There are limits for the 401(k) type, and company match 401(k) percentages, and limits vary by type. 

For a traditional 401(k), employers can contribute a percentage of each employee’s compensation to the employee’s account regardless of what the employee contributes. This is called a nonelective contribution. Or they can choose to match the amount employees decide to contribute within the limits of the law. Some employers elect to do both.

For a SIMPLE 401(k), employers can contribute either up to 3% of total pay, in case of a dollar-for-dollar matching contribution, or a nonelective contribution of 2% of pay for each eligible employee. That means if you earn $100,000 a year, your employer may contribute $2,000 to $3,000 a year. 

For a Safe Harbor 401(k) , employers can match eligible employees’ contributions, dollar-for-dollar, up to 3% of the employee’s compensation. Then, they can match 50 cents on the dollar for the employee’s contributions that exceed 3%, but are less than 5% of the employee’s compensation.

For an automatic enrollment 401(k), the employer must make a matching contribution of 100% for salary deferrals up to 1% of compensation. Then, they can make a 50% match for all salary deferrals above 1% up to 6%. Alternatively, employers can also choose to make a nonelective contribution of 3% compensation to all participants.

Understanding Total Contribution Limits

It’s important to understand and consider employee and employer contributions when evaluating the overall contribution limits imposed by the IRS for a 401(k) plan.

The maximum amount for total employer and employee contributions must be the lesser of 100% of the employee’s compensation or $66,000. That means that if you’re earning $50,000 per year, the maximum 401(k) contributions you can make, including all employer matches, is $50,000. If you’re earning over $66,000 a year, the maximum employer contributions you can have in 2023 is $66,000.

Catch-Up Contributions for Older Employees

The IRS allows for catch-up contributions to employees 50 or older. Anyone older than 50 can make additional contributions beyond the standard limits for 401(k) plans. As of 2023, employees can contribute up to $30,000. The total limit for employee and company match 401(k) contributions is $73,500 if you’re 50 or older. 

Coordination With Other Retirement Plans

For many people, a 401(k) will be their primary retirement investment vehicle. But many don’t rely solely on their 401(k)s. You may also choose to invest in a Roth or traditional individual retirement account (IRA) or have real estate investments or taxable brokerage accounts. There is no limit to your amount in a brokerage account or real estate investments. For Roth or traditional IRAs, you can contribute up to $6,500 in 2023, or $7,500 if you’re older than 50. 

You may need to speak to a financial adviser to coordinate the best retirement accounts for your situation. As long as you maintain contribution limits, there’s no reason you can’t have both a 401(k) and an IRA as part of your retirement planning.

Maximizing Matching Contributions

To maximize matching contributions, first understand how much your employer is offering and whether it is tied to your contributions. If it is, make a habit of automatically contributing the maximum matched value with each paycheck. At the end of the year, double-check an employer’s maximum contribution limits to ensure you’ve met or exceeded them.

Some companies also have a vesting schedule, which delays employer-contributed funds or requires employees to forfeit employer-matched funds if they leave the company before a set number of years. Check your employer’s vesting policies, and be sure to work there long enough to take full advantage of employer-matched options.

Maximizing Your Employer-Matched 401(k)

A company-matched 401k can be a powerful way to save for retirement. Whether your employer contributes $1,500 per year or $1,500 per month, it’s extra income that will grow over time. Because some employer match calculations can be confusing, speak with your company’s human resources department to understand the maximum possible match contributions for your case. Make sure to maximize your options so you don’t leave money on the table.

Frequently Asked Questions