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10 Things Employers Need to Know About the 401(k) Employer Match

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From game tables in the office and flexible work schedules to paid time off for passion projects, employers are continually coming to the table with new and exciting ways to keep workers happy and, ultimately, loyal to a company. However, one traditional benefit remains at the top of many employees’ must-have lists – the 401(k).

A 401(k): More Important than Ever

Benefits providers realize, as one senior director of retirement at risk management firm Willis Tower Watson put it, “A good 401(k) plan shows that the employer is invested in its employees.”

Employers say a retirement savings program, such as a 401(k), is rising in value as a benefit offering (partly because the Affordable Care Act has devalued health insurance). However, one key piece here that determines the value of the 401(k) to employees is an employer match, contributions that an employer makes into the account (and that may be in addition to any employee’s contributions).

If you do provide your employees with a 401(k) plan, employer matches are entirely optional. You can always decide to add this feature later, or you can elect to offer a partial match.

Read on to learn the basics of employer matches.

Employer Match FAQ

1. What’s a typical employer match?

Regardless of whether or not automatic enrollment is part of a 401(k) plan, the matching amount contributed by employers varies greatly from one company to the next. According to 401(k) plan data analyzed by Fidelity Investments, the average match on employee contributions is 4.7% of their annual salary, a record high since 2008’s Great Recession. Combined with the average employee contribution of 8.8%, average total 401(k) contributions over the last ten years have risen to 13.5%, indicating both employers and employees are focused on long-term savings.

2. Can I afford it?

Offering a retirement plan with a match may be less expensive than you think: With modern providers, a 401(k) for an entire company may cost less than a single employee’s health insurance. Companies that offer some level of matching are likely to stand out among similar businesses that do not offer this benefit, giving a boost to recruitment and retention initiatives.

3. What companies offer the best employer match?

Not all matches are created equal — they vary widely. According to Vanguard, the top 16% of plans provide employer matches worth 6% or more of pay. A few standout examples include:

4. When do employer matching contributions become vested?

As part of a company’s retirement savings plan, there may be rules pertaining to what’s known as the vesting schedule, that is, rules outlining whether contributions the employer makes are owned by the employee immediately or not until after some waiting period. If there is a vesting schedule and, if the employee leaves before the contributions become fully vested, then some portion of the matched contributions would be returned to the employer.

Like matches, vesting schedules vary by employer. While some plans offer immediate vesting, others have a specified period of time (say, one year) before an employee is vested. Still, others take a graduated approach, with an increasing portion of the employer match becoming owned by the employee over time (say, 20% of the contribution with each year of service).

5. What do small employers do?

6. How is an employer match calculated?

Ever wondered how matching works? It varies. A lot.

There are literally hundreds of matching formulas out there; however, a recent study from Vanguard reveals the types of formulas that are commonly used. The most common involves matching $0.50 of every dollar the employee contributes, up to a set percentage of employee contributions. For example, this type of match with a 6% limit equates to a 3% matching contribution from the employer, so long as the employee is contributing at least 6%.

Match TypeExample FormulaPercentage of Plans Using This Type
Single-tier formula$0.50 per dollar on the first 6% of pay71%
Multi-tier formula$1.00 per dollar on the first 3% of pay; $0.50 per dollar on the next 2% of pay21%
Dollar capSingle- or multi-tier formula with a $2,000 maximum6%
OtherVariable formula, based on age, tenure or similar vehicles2%

7. Are there rules for 401(k) matches?

Employees can make pre-tax contributions to a 401(k) plan up to the $19,500 maximum for 2020 (or $26,000 for those over age 50). Employer contributions may lead to a total contribution in excess of $19,500* — that is, they’re outside the annual contribution limit applied to employees.

An employer is typically the one to set rules around their maximum contributions. It’s largely driven by the matching formula and rules that the employer lays out.

One more caveat to know here: If the employee is also the employer, e.g., if they are self-employed, then an employee can contribute up to $56,000 (for 2020), or 100% of their compensation, whichever is less.

*$19,500 if they’re under age 50; $26,000 is the annual contribution limit for employees if the employee is age 50 or older.

8. What is a Safe Harbor match?

A Safe Harbor 401(k) plan is an employer-sponsored retirement plan designed to automatically pass the non-discrimination testing required by the IRS. See more about Safe Harbor plans here. In this type of 401(k) plan, an employer is required to provide a match, aka a Safe Harbor match, which can be either:

9. Can you match within a Roth 401(k)?

A Roth 401(k) is an employer-sponsored retirement plan in which contributions are taxed upfront, rather than at the time of withdrawal as in a traditional 401(k). Not every employer offers a Roth option. For those that do offer a match within a traditional 401(k), they’ll likely offer the same matching formula within a Roth 401(k) they offer. Learn more about Roth 401(k)s here.

10. Are employer contributions tax-deductible?

Contributions made on behalf of employees into an eligible retirement savings plan can be deducted on the company’s federal tax returns each year. (Also, start-up plans may be eligible for a $500 tax credit for the business, limited to the first three years of the 401(k) and not exceeding the total plan expenses in any given year. These tax savings can help offset both the cost of offering a 401(k) plan and matching contributions made by the employer.)

In addition to boosting hiring and retention, offering an affordable 401(k) with a match can provide SMBs with other business advantages as well. Read more about why small businesses should offer a 401(k) to their employees.

Key Takeaways

Do your employees need guidance? Here’s a resource to help employees make the most of their employer match.

The Human Interest Team The Human Interest Team

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

Small and medium businesses can be prepared, too.

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Human Interest - The 401(k) provider for small and medium-sized businesses

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Get free 401(k) resources now. Learn more about 401(k)s for you and your company.