How Does 401(k) Matching Work?

Learn how to take full advantage of your employer’s plan

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 Getty Images/JGI/Jamie Grill

If you want to take full advantage of your employer-sponsored retirement plan, you’ll need to understand how 401(k) matching works. That’s because a 401(k) match—money that your employer contributes to your retirement plan—is essentially free money that can easily boost your savings. However, you may need to contribute a certain amount to qualify for the full benefit, and some of the money may not be yours to keep immediately. 

How 401(k) Matching Works 

Many employers that offer a 401(k) also offer 401(k) matching. Just like it sounds, “matching” means that for every pre-tax dollar you put into your 401(k) account, your employer will add a certain amount as well, up to a limit. The amount employers will contribute and the maximum amount they’ll put in varies by employer, and typically follows a specific formula.

For example, a common matching formula is 50% of employee contributions, or 50 cents for every $1 of employee contributions, up to a maximum of 6%. That means if you contribute at least 6% of your base pay to the 401(k) plan, your employer will add another 3% of your base pay to the 401(k) plan.

Other companies match your contributions dollar-for-dollar, but may have a lower maximum. So another company using a 3% matching formula might match your contributions dollar-for-dollar, but only up to a maximum of 3% of your base pay.

Companies also aren’t obligated to start matching right away. You may have to work a certain period of time before you become eligible for a 401(k) match. 

What is a Good 401(k) Match?

The 3% matching formula above is common. Therefore, if you are offered more than this from a current or prospective employer, you may consider it a good 401(k) match. 

To take full advantage of your employer 401(k), you need to contribute at least enough to receive all your matching contributions.

How 401(k) Vesting Works

While your company might make 401(k) contributions on your behalf, you might not have full ownership of that money right away. 401(k) vesting refers to the amount of ownership an employee has in the matching contributions. 

Think of your contributions and your employer’s matching contributions as two separate buckets of retirement savings. Your contributions are always 100% vested, meaning that you always own 100% of the money you’ve contributed, plus any earnings attributed to the investments.

You may not own your employer’s matching contributions, however, until a certain period of time has passed. If you leave the firm, you automatically forfeit any money that isn’t vested.

Frequently, companies offer what’s called “graded vesting,” or gradual vesting, which means your ownership over the matching funds slowly increases over a set period of time. If you leave the company prior to becoming fully vested, the vesting schedule will determine what percentage of the employer matching contributions have been earned. 

Once the required years of vesting has passed, the employee is 100% vested, or what is often referred to as “fully vested” in the 401(k) match. 

A commonly used six-year graded vesting schedule is zero percent vesting in the first year of service, then 20 percent vesting per year for the following five years. The longest vesting period legally allowed is six years.

Example of 401(k) Matching: Graded Vesting Schedule
Years of Service Graded Vesting
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

If your employer used the above six-year graded vesting schedule and you terminated employment after five years of service, you’d be 80% vested in the employer matching contributions. Remember that you are always 100% vested in your own 401(k) contributions.

401(k) Matching and Contribution Limits

Keep in mind that the maximum annual 401(k) contribution limit does not include matching contributions from your employer. In the 2019 tax year, you can contribute $19,000 of your own pay—and you may receive 401(k) matching contributions in addition to this maximum. If you are 50 or older, you may contribute another $6,000 catch-up contribution.

Bottom Line

To take full advantage of your 401(k) plan, be sure that you contribute at least enough of your own pay to receive all of the employer matching contributions. If you want to learn more about how 401(k) matching contributions work in your own 401(k) plan, your employer is required to provide you with a summary plan description, or SPD, that specifies the amount of employer matching, the vesting schedule, distribution options, and more. 

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