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401(k) employer match rules: 10 things for employers to know

13 MIN READEditorial Policy

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. 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.

Start a 401(k) with Human Interest

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Additional reading:

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:

  • Boeing: Written up time and time again, Boeing is consistently known for a strong 401(k) offering, including an employer match. Employees can contribute between 1% and 30% of their salaries, and the company matches 75% of the first 8% of the employee’s contribution. There’s also a discretionary contribution by the company of between 3% and 5% per year based on the employee’s age.

  • Amgen: It makes a 5% contribution upfront whether or not the employee makes a contribution to the plan. In addition, the company matches employees’ contributions up to 5% of their salary for a total contribution of 10%.

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?

  • Some don’t match. According to Vanguard, 25% of 401(k) plans at small businesses do not provide an employer contribution. Matching is not mandatory but many employers provide this benefit because it helps with recruiting and retaining talented employees and shows they’re investing in their employees’ future. 

  • Some match right away; some have a wait. Among small businesses that offer employees a 401(k) match, 19% of plans provide immediate employer-matching contributions; 40% require one year of service before employer-matching contributions kick in.

  • The majority offer immediate vesting: 69% of plans offered by smaller businesses provide immediate vesting for employer-matching contributions (Vanguard, How America Saves, Small Business Edition, 2018).

6. How is an employer match calculated?

Employer 401(k) match programs usually incorporate two figures when calculating a total possible match contribution: a percentage of the employee’s own contribution and a percentage of the employee’s salary.

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%

Source: Vanguard

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

Employees can make pre-tax contributions to a 401(k) plan up to the $22,500 maximum for 2023 (or $30,000 for those over age 50). Employer contributions may lead to a total contribution in excess of $22,500* — 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 $66,000 for 2023 ($61,000 for 2022)*, or 100% of their compensation, whichever is less.

*$22,500 if they’re under age 50; $30,000 is the annual contribution limit for employees if the employee is age 50 or older. $66,000 is the total if you’re under age 50. If you’re age 50 or older, the $7,500 catch-up contribution can be added on top.

8. What is a Safe Harbor match?

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

  • A Safe Harbor matching contribution – This type of match is based on how much an employee chooses to defer and put into their 401(k). There are two sub-options:

    • Basic match: Employer matching contributions are a 100% match on the first 3% of compensation plus a 50% match on deferrals between 3% and 5% (4% total).

    • Enhanced match: Employer matching contributions must be at least as much as the basic match at each tier of the match formula. A common formula is a 100% match on the first 4% of compensation.

  • A Safe Harbor nonelective contribution – Regardless of whether or not an employee contributes anything to their 401(k), the employer matches 3% (or more) of that employee’s annual compensation.

Want to learn how much a safe harbor plan would cost your business? Use our tool to calculate your costs.

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 – though regardless of whether you use a traditional or Roth 401(k) – or both – employer match contributions go into a traditional 401(k) account. 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

  • Like retirement plans, employer matches are not universal and may vary a lot among companies. Consult a plan administrator when determining what to offer, including the specific match formula and vesting schedule.

  • When an employer match is available, employees are more likely to make contributions as soon as they are eligible, creating a longer timeframe to accumulate savings.

  • Overall, a 401(k) match, despite its cost to the employer, can pay off over time for both companies looking to attract and retain talent as well as their employees.

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

Get started with an affordable, full-service 401(k) plan.

Start a 401(k) with Human Interest

A Human Interest 401(k) plan can connect directly with your favorite payroll provider and has zero transaction fees.

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 education, and integration with leading payroll providers.

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