Participant Corner : Employer Matching – How to Make the Most of Your Plan
Many defined contribution plans include something called employer matching, meaning your employer contributes a certain amount to your retirement savings plan based on your personal contribution. In 2024, individuals can contribute up to $23,000 into their 401(k) according to SEC guidelines. Although, when combined with employer matching, the cap comes to $69,000 per year. If you are over 50, you are allowed to contribute an extra $7,500 a year as “catch-up.” It is also important to be aware of your employer's vesting schedule which dictates your ownership in employer contributions based on years of employment – if you are terminated, contributions made by your employer can be forfeited based on this schedule.
Employers use various match formulas to determine their contribution; we have highlighted three common scenarios that show the importance of knowing the facets of your retirement plan.
Example 1: Match 100% of contributions up to a percentage of your total compensation
Dollar-for-dollar matching where, if you make $50,000 and they contribute up to 6% of your salary, they will add in $3,000 if you contribute $3,000.
If you contribute $4,000, they only add $3,000.
If you contribute $2,000, they add $2,000, not $3,000.
Example 2: Match 50% of contributions up to %6 of salary
If you make $50,000 and contribute $3,000, which is 6% of your salary, your employer adds in $1,500.
Example 3: Match up to a certain dollar amount
Will match up to $5,000. This means, that even if you are making $20,000 vs $80,000, the maximum amount you get in matching contribution is $5,000.
If you contribute $4,000, your employer only contributes $4,000.
We will leave you with this: If you are not making annual contributions to your retirement account, you are missing out on employer additions to your accounts.
Sources:
White, C. (2024, August 26). How 401(k) Matching Works. https://www.investopedia.com/articles/personal-finance/112315/how-401k-matching-works.asp#:~:text=Employer%20matching%20of%20your%20401%20%28k%29%20contributions%20means,be%20matched%20by%20employer%20contributions%20in%20several%20ways.