What 401(k) employer match is and how it works

When applying for a new job, you’ll often see the terms “401(k) matching” in the description of benefits offered.

But not all 401(k) benefits are the same. For instance, some companies provide employer matching, while others don’t. And not all of the employers that do offer matching do so at the same rate. Additionally, there are different types of 401(k)s to consider –– Roth and traditional –– which is the best option for you?

Let’s explore how 401(k) employer matches work so that you can be more informed about your financial future and retirement planning when you’re making your next career decision.

What is a 401(k) employer match?

A 401(k) plan is an employer-sponsored retirement account that employees can pay into. Many employers match contributions up to a curtain percentage, so a 401(k) employer match is a type of added employee benefit on top of the investment account itself.

401(k) employer match essentials

• Employees can contribute part of their salary towards a 401(k) retirement account. This is typically done via a percentage amount, but can also be done by an employee choosing a dollar amount. 
• 401(k) employer matching involves companies also contributing to their employees’ accounts.
• If an employee contributes to their employer-matching 401(k) program, employers will match this contribution up to a certain amount. Put simply, a 401(k) match program is essentially free money for employees.
• The average employer 401(k) match is at an all-time high at 4.7%. This means that, on average, companies will match 4.7% of an employee’s salary toward their retirement. 
• Employee deferrals to 401(k) plans vary greatly. But on average, employees contribute 8.8% yearly. This percentage, combined with a 4.7% match from an employer, means an employee could save 13.5% of their total salary (pre-tax) in their 401(k) plan.  So, if you make $45,000 per year, you can expect to save an average of $6,075 per year in your 401(k) savings account.
• There are two types of 401(k) plans: traditional and Roth. The biggest difference between the two is that contributions to traditional 401(k) plans are tax-deferred while Roth 401(k) is built with after-tax contributions.

Why do employers match 401(k)?

401(k) employer matches are one of the best job benefits available for employees. But these matches are entirely optional for companies. Even if they offer a 401(k) program, they have no obligation to contribute any amount whatsoever to their employees’ accounts.

So why do employers match 401(k) contributions for their employees?

Recruiting: A 401(k) company match program is a powerful way to incentivize employees to come work at an organization. This kind of employee benefit can strengthen a company's employer branding as a leader in developing a people-centric business.

Retention: Employees are less likely to leave a company that satisfies their financial needs and offers competitive benefits. So a competitive 401(k) employer match program can also drive employee retention. And employee retention can help employers build a more resilient organization.

A stronger workforce: By offering benefits packages that help employees feel valued, organizations can rely on the talent they have. They can capitalize on the intellectual and human capital they're retaining. And an organization safely invest in developing employees into leaders, since the people they develop are more likely to stay.

How does a 401(k) employer match work? 

Once you sign up for a company’s 401(k) plan as an employee, you’ll get to decide how much money you want to contribute from every paycheck before tax. Then, your employer will deduct this amount from your paycheck before income and payroll taxes are calculated.

For example, if you make $1,875 pre-tax per paycheck and decide to deduct 4%, you’ll be putting $75 into your 401(k) account per pay period. The remaining $1,800 will be taxed.

Finally, the employer will automatically contribute the amount they agreed to, depending on their matching policies. They may match a percentage of your own contribution or provide a dollar amount.

The 401(k) employer match rules limit when and why you can take a distribution from your 401(k). A distribution is the technical term for when money is withdrawn from a retirement account. If you decide to withdraw from your 401(k) account early, you may be subject to penalties.

The IRS considers it an early withdrawal if you take money out before you reach age 59 ½. You’ll have to pay an additional income tax of 10% (on this distribution) if you do this.

Some exceptions apply, including (but not limited to):

• Qualified higher-education expenses
• Disability of the owner
• Corrective distributions
• Permissive withdrawals from a plan with auto-enrollment features
• After the death of the participant
• Rolling over your 401(k) into an IRA

Most organizations also use a vesting schedule. This means that the money they match to your contributions doesn’t belong to you until after a certain period of time. Instead, they’ll invest this money separately from your own contributions.

Every year, they combine a certain percentage of that amount with an employee’s contributions. So, if a company has a four-year vesting schedule, 25% of their matching contributions are yours after a year. You would only be able to keep the full contributions after four years.

Companies do this to incentivize you to stay with them long-term.

How much can you contribute to a 401(k) in 2024?

Annual contribution limits for 401(k) accounts change every year. In 2024, the IRS states that this limit is $22,500. This means that you are not allowed to contribute more than this amount from your paycheck.

There’s an exception for participants who are 50 years or older. They can contribute an extra $7,500 to their 401(k). So, if you are over 50 years old, you can contribute a total of $30,000 in 2023.

But there are also limits to the 401(k) employer match. Employers can match up to 100% of your own contributions, but no more. This, however, would be extremely rare to begin with. 

So if you are 50 years of age, or older, and contribute $30,000 and your employer provides you with a 100% match, you’ll save a maximum of $66,000 in one year.

Keep in mind that IRS contribution limits change every year. So while these numbers may be true for 2023, they may change next year.

Does the employer match count towards 401(k) limits?

When your employer matches your 401(k) contributions, the match doesn’t count toward your own limits.

So, if you contribute the limit of $23,000 in a year, your employer can still match those contributions. You won’t exceed your limit so long as you don’t contribute more than the allowed amount.

Types of 401(k) employer matches

Not all 401(k) employer matches work the same way. Every company has different policies for how much they match your contributions.

Some companies do not offer employer 401(k) matching at all. For example, tech startups and small businesses typically do not offer 401(k) matching. But larger companies such as airlines and insurance companies often match 401(k) contributions.

Here are the two main types of 401(k) employer matches you’ll see:

1. Partial matching

Partial matching is when your employer matches your 401(k) contributions, but only up to a certain percentage.

Some employers match contributions up to 50% of what you save. But it’s possible to have other percentages as well. For example, they can set a 2% match, 25% match, 75% match, or any other percentage of the total amount you contribute.

Most companies usually set a limit to how much of your base pay you can contribute until they stop matching. This is usually set at 4% or 6% of your annual salary.

Let’s say your employer provides a partial match of 50% for up to 4% of your base pay. For example, your salary could be $35,000 and you contribute $1,400, which is the maximum amount your employer agrees to match. In this case, they’ll match 50% of that, which is $700. After one year, you’ll have $2,100 saved towards your retirement account. 

2. Dollar-for-dollar matching

A dollar-for-dollar match is also known as a full-match or a 100% match.

It’s similar to partial matches, except that your employer matches your entire contribution. This will usually be up until a certain amount, just like partial matches.

So if you contribute 6% of your salary, your employer will also match 6%. That’s unless they have a contribution limit of 4%. If this is the case, they will only match up to 4%, even if you contribute more.

401(k) matching example: Boeing 

So what can a 401(k) employer match look like in real life?

Let’s dissect a real company’s investment policies to see how 401(k) matching can break down.

Boeing matches 401(k) contributions for their non-union employees. They provide a 75% match on the first 8% of base pay contributions that employees make.

In addition to this 75% match, they make age-based contributions.

When you’re newly hired at Boeing, you’re automatically enrolled at a rate of 4% of your base pay. Every year, your rate increases by 1% until you reach the 8% limit.

So here’s how it breaks down. Let’s say you have a salary of $45,000. In your first year, you can contribute up to $1,800. Boeing will match $1,350. So you can save up to $3,150 each year tax-free. You can contribute more, but Boeing won’t match those contributions.

By your fourth year, you can contribute $3,600. Boeing will match $2,700. So you can contribute a maximum of $6,300 tax-free until your salary increases.

If your salary were increased to $50,000 by that fourth year, you’d be able to save a total of $7,000 per year by combining your contributions and Boeing’s matches.

Of course, you could make bigger personal contributions each year. But Boeing wouldn’t match those employee contributions.

So if your salary is $45,000 and you decide to contribute $10,000, Boeing still wouldn’t contribute more than $2,700.

It’s okay for you to contribute more as long as you don’t go over the annual IRS contribution limits.

How 401(k) matching helps you reach your retirement goals

There are several benefits to 401(k) matching.

First, the amount of money taken from your paycheck is pre-tax. So is the amount your employer will match. This means that you don’t pay taxes on this money. Of course, this is true whether or not your employer matches your contributions.

You’ll pay taxes when you take the money out when you retire. But during retirement, you may be in a lower tax bracket. This means you won’t pay as much in taxes on your retirement income as you would during your prime working years.

Another benefit is that both your employer’s contributions and your own belong to you. Even if an employer makes a contribution, you can take this money with you when you change jobs. 

Of course, you can only take what belongs to you based on the company’s vesting schedule.

Most importantly, 401(k) matching can make retirement planning less stressful and help you reach your retirement savings goals. 

At birth, life expectancy in the US is 78.7 years. But at age 65, the amount of time left you’re expected to live is 19.5 years.

This means that you need to account for almost 20 years of savings if you want to retire by age 65.

And while social security does provide some money for retirees, the average monthly amount for retired workers is $1,388.08. You also need to account for medical expenses and healthcare costs.

On average, the estimated amount you’ll need to cover medical expenses during retirement is $295,000.

When you have enough money saved up, you can enjoy your retirement without having to worry too much about your quality of life. The more you have, the more you can live comfortably.

You’ll also have more freedom to spend your newfound time doing the activities you choose.

Keep in mind that retirement is a ramp, not a switch. This means that it’s best to contribute to your 401(k) throughout your career, not just at the end. When you do this, you’ll accrue more interest, and your money will work harder for you.

Make the most of the 401(k) employer match 

As an employee, you can make the most of a 401(k) employer matching program when you maximize your contributions.

So the next time you have an opportunity to invest in your future with the support of your company, you know what to look out for.