Different 401(k) employer match types (with examples)

What is an employer 401(k) match?

A 401(k) is an employer-sponsored, tax-advantaged retirement plan. Employers can both host employee contributions and make contributions to these plans. Employer match provisions in the plan allow employers to make contributions to employees based on factors such as the employee’s salary and the employee’s contributions.

Many employers match a portion of the employee’s own contributions up to a certain dollar amount or percentage. Employer matching contributions may be optional depending on the plan’s provisions. This is a powerful incentive for small companies wanting to attract and retain good employees. The majority of employers do provide some type of match (86% match of small businesses and 95% of large businesses, according to the Plan Sponsor Council of America). The average employer match is 4.5% of an employee’s salary. 

The 401(k) plan document will set the rules for receiving a match contribution and may specify the matching formula itself. These match contributions form part of an employee’s total compensation package, along with access to a 401(k) plan and other benefits. It is advisable that employees should consider a potential employer’s contribution plan when evaluating a job offer. In fact, according to a 2022 survey of 2,000 Americans, a 401(k) plan is the most wanted employee benefit, after health insurance.

For example, a job with a $100,000 salary and an employer 401(k) match of up to 5% of the employee’s salary — $5,000 — could be seen as more advantageous than a job with a $102,000 salary and no employer 401(k) match option. Not only do you receive more total compensation, but you also have an additional incentive to invest in your 401(k), which is a great tool for retirement planning and tapping into the power of compound interest.

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How does the employer match work?

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. Employers might match 25%, 50%, or even 100% of an employee’s contribution up to a set percentage of the employee’s salary.

Some companies may offer a full match, also known as a dollar-for-dollar match, while others offer partial matching at a smaller percentage. Other employers may set a hard dollar-based cap instead of limiting match contributions to a percentage of the employee’s total salary. Total employer contributions cannot exceed 25% of eligible employees’ annual compensation.

No matter what your company’s match program is, it’s important to strategize. Retirement experts and financial advisors regularly encourage employees to contribute enough to reach the maximum possible employer contribution, or at least as much as they can comfortably contribute. This ensures employees aren’t leaving free money “on the table,” especially since it’s part of their total compensation package.

Matching contributions: How much and when

Whenever possible, it’s a smart strategy to contribute enough to your 401(k) account to “max out” your employer contribution. That means you may need to time your contributions carefully. Just like employers can set their own contribution level guidelines — as long as they comply with Employee Retirement Income Security Act (ERISA) requirements — employers can also decide when in a given year they contribute to your 401(k). However, every company can operate differently. An employer may make regular contributions based on an employee’s contributions per paycheck, or make an annual contribution after the end of the plan year based upon the employee’s deferrals in the prior year.

There are literally hundreds of matching formulas out there, so refer to your Summary Plan Description or contact your plan administrator regarding the rules and specifics of the matching formula used by your employer.

The most common matching formula among Vanguard plan holders (a sample representing 5 million people!) was $0.50 per dollar on the first 6% of pay. The second most popular formula for employer matching contributions is $1.00 per dollar on the first 3% of pay and $0.50 on the next 2% of pay.

Here are some common employer matching formulas:

Source: Vanguard, How America Saves 2023

Do employers match contributions right away? Most do. However, some employers may require you to work a minimum period of time before starting to match your contribution. In 2020, 22% of Vanguard plans required one year of service for matching contributions.

While you can contribute up to the maximum amount specified by the IRS, you can contribute less. To make the most out of your workplace retirement plan, it’s recommended to set your minimum deferral contribution as the minimum amount required to receive your employer’s maximum matching contribution.

Let’s calculate what a match might look like assuming you have an annual salary of $50,000:

By setting your annual contribution to the ceiling of your employer’s matching contribution, as shown in our examples, your annual contribution becomes 50% to 80% larger than if you had only your individual contribution.

In 2022, the average employee contribution to maximize employer match was 6.8% of their annual pay, according to Vanguard data. Your plan rules will dictate the actual contribution percentage to maximize your employer match so refer to your Summary Plan Description or contact your plan administrator for more details.

Employer matching contribution formulas

Employers have many options when choosing their match contribution formulas. Four of the most common formulas are:

• Employers match employee contributions dollar for dollar up to a set dollar amount per employee.

• Employers match employee contributions at a set percentage of each employee-contributed dollar up to a set dollar amount per employee.

• Employers match employee contributions dollar for dollar up to a percentage of the employee’s salary.

• Employers match employee contributions at a set percentage of each employee-contributed dollar up to a percentage of the employee’s salary.

Annual contribution limits

The Internal Revenue Service (IRS) limits how much money individuals can have contributed to 401(k)s in their name each calendar year. For 2024, an individual’s 401(k) account can only receive up to $69,000 or 100% of the individual’s salary throughout the year — whichever amount is lower. This amount includes:

• An employee’s deferral contributions (capped at $23,000, or $30,500 for employees over 50 years old, in 2024).

• An employee’s after-tax contributions.

• All employer-based contributions.

The annual deferral cap of $23,000 (or $30,500 for employees over age 50) applies whether a participant holds multiple jobs or changes jobs during the year. Employer contributions do not count towards the $23,000 (or $30,500) deferral cap, but they do count toward the $69,000 total cap.

401(k) vesting schedules

Another element in many employer 401(k) match programs is a vesting schedule. Vesting schedules establish how much of the employer contributions deposited into your account are owned by you, depending on your length of employment. For example, employers may set a vesting schedule of 25% ownership after one year, 50% ownership after two years, 75% ownership after three years, and 100% ownership after four years. If your employment ends before the fourth year, you forfeit the unearned amount to the plan. However, that forfeiture only applies to employer contributions; you retain full ownership of any contributions you make to your own 401(k).

There are three general types of vesting schedules:

• No vesting period, so you retain 100% ownership immediately.

• A vesting “cliff,” in which you retain 0% ownership of your employer contribution until your employment period reaches an established length of time (e.g. wait three years to gain 100% of ownership).

• Graded vesting gradually grants you ownership over the employer contributions over a period of time (e.g. gain 20% of ownership every year until you get 100% ownership in year five).

If you were to part ways with your employer, you can only take employer contributions that have fully vested. That's why employees are likely to prefer employers that offer immediate vesting. In fact, according to a research panel focused on employee tenure, recruitment experts agree that immediate vesting can be a great recruitment tool for businesses.

Timing payments for maximum effect

Many employers match their contribution schedule to their employees’ contribution schedules. In other words, any pay period during which you make a deferral contribution, your employer makes a matching contribution as well. However, every employer is slightly different, and the plan administrator can assist you with questions on optimizing your contribution deductions to receive the maximum matching contribution.

What if I have a Roth 401(k)?

Roth 401(k) accounts, like Roth IRAs, accept post-tax contributions, or contributions on which you pay income taxes now but don’t have to pay upon withdrawal. However, in most cases, employer matching contributions will be deposited pre-tax and subject to income tax upon withdrawal.

401(k) Employer matching FAQs

What does a 6% 401(k) match mean?

If an employer offers a 6% 401(k) match, it means the employer will match an employee’s 401(k) contribution of up to 6% of the employee’s annual compensation. Let’s say an employee earns $60,000 per year and contributes 6% of that salary ($3,600) to their 401(k). With a 6% match, the employer would also contribute $3,600 to the employee’s 401(k).

What is considered a good 401(k) match?

When considering data from recent studies conducted by both Vanguard and by the U.S. Bureau of Labor Statistics, any full match between 4% and 6% is good. Anything above 6% would be considered great.

How does matching work with a safe harbor 401(k)?

A safe harbor 401(k) plan is different in that it ensures all eligible participants receive an employer contribution. When it comes to safe harbor plans, there are three types of contributions: basic match, enhanced match, and nonelective. 

Learn more details and find out how matching works for all types of safe harbor plans.

The average employer 401(k) match amount is at an all-time high: See how yours compares

Many retirement professionals recommend that individuals put at least 15% of their annual income into retirement accounts. Employer match contributions reached an all-time high average of 4.8% in Q1 2023, and that can be a powerful incentive for employees. Employers who want to encourage employee retention and good financial planning among their employees can use match programs to help their employees save and attract talented prospects to their company. In fact, according to a 2022 study by WTW, strong retirement plans are an increasingly important employee benefit, causing many companies to enhance their offerings.

If you want to learn more about your 401(k), we’re here to help. Contact our support team at Human Interest today to learn about our flexible management tools and how to help your employees save for their retirement. And if you want your company to start offering a 401(k), you can also read our Employee’s Guide to Asking Your Manager or Boss for a 401(k) for your company.