What Is a 401(k) Employer Match?

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Some employers offer a 401(k) match as part of the company benefits package. If yours does, consider yourself fortunate and make the most of it. It's free money you can think of as a reward for doing something you should be doing anyway: saving for your retirement.

Percentage of Salary

A 401(k) match is generally set up as a percentage of an employee's salary, commonly around 6%.

The employer's contribution is a certain percentage of the employee's contribution. A generous employer will match the entire employee amount, making a dollar-for-dollar, or 100%, contribution. Other companies contribute 50% or less of what the employee pays in.

Let's use a worker with a salary of $50,000 as an example. If she contributes 6% of her salary into the company 401(k), she will have $3,000 in the plan after the first year. If her employer does a 100% match, she will have $6,000 in the plan. If her employer does a 50% match (or 3% of the employee's salary), she will have $4,500 in the plan.

Vesting Schedule

Most 401(k) plans require you to work a certain length of time before you are eligible to receive all the money your employer has contributed. Once you have stayed with the company for that length of time, you are said to be fully vested in the plan and can take all the employer-matched contributions if you leave for a new job.

Many employers establish a graded vesting plan that gives you increasing access to the matched funds the longer you work for the company, up until the fully vested date. For example, let's say, the employee making $50,000 a year was not able to participate in the 401(k) until she had been with the company for one year. Her company allows her to have access to only 25% of the matched contributions at the end of that second year. Her vesting increases by 25 percentage points each year until she becomes fully vested after five years as an employee.

Employers use graded vesting as an incentive to encourage company loyalty. If you are only 50% vested when you leave your job, that means you leave with only 50% of the money from your employer's match.

Matches and the IRS

Another good reason to take advantage of the 401(k) match is that it allows you to exceed the annual 401(k) maximum contribution limits set by the Internal Revenue Service. In 2019, you can contribute up to $19,000 of pretax income in a 401(k). If you are 50 or older, you can save $6,000 more in so-called catch-up contributions, for a total of $25,000.

Employer-matched funds are not counted toward those limits. If you are fortunate enough to be able to contribute the legal maximum yourself, you won't run afoul of the IRS because your employer match pushes you over that amount.

Contribute in Every Pay Period

Your plan administrator can help you figure out how much you need to contribute from each paycheck to reach your maximum amount for the year at the very end of the year. That way, you'll be certain to get the employer match for every payment you make.

If our example worker is paid twice a month, she would contribute $125 ($3,000 divided by 24) per period to ensure she gets a match from her employer in every paycheck.

Read more about Safe Harbor 401(K)'s.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.