What Is a 401(k) Employer Match?

An Employer Match Can Make Your 401(K) Even More Attractive

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You may not know what a 401(k) match means, but if your employer offers it, you might keep hearing that you should be taking advantage of the employer match in your 401(k) plan. If your employer matches any portion of your contributions, it means free money for you, and in most cases, it makes sense to take full advantage of it.

To ignore your employer's 401(k) match is to miss out on money you are being offered as part of your benefits package. In fact, not all companies offer a matching program, so if yours does, consider yourself fortunate and make the most of it. Here's what you need to know about matching contributions in a 401(k) plan.

Know How Much Your Employer Matches

Find out how much of your 401(k) contribution your employer is willing to match. This is usually expressed as a percentage, and you can most likely find out the answer through a quick call to Human Resources. There is no standard 401(k) contribution amount that employers use, and companies can choose how much they want to add to an employee's plan. 

One common employer-matching contribution within 401(k) plans is a dollar-for-dollar employer match up to the first 6 percent of salary. That means for every dollar you contribute up to 6 percent of your salary, your employer contributes the same amount to match your contribution.

Vesting: The Rate of Your Employer Match

Vesting is where employer matching gets a little tricky. Vesting is the access that you have to your full match over time. If you are fully vested, your employer-matching funds are all yours. If you leave the company, you can take the money with you. Many employers have a graded vesting schedule, which gives employees increased access to their matching funds the longer they stay with the company.

For example, with a typical vesting schedule, you may not be able to participate in the 401(k) until your second year as an employee. Your vesting may then increase by 25 percent each year until you are fully vested after 5 years as an employee. Employers use this as an incentive to encourage loyalty in a competitive job market. If you are 50-percent vested when you leave a company, that means you leave with only 50 percent of the money from your employer's match. It is important to know the impact of your vesting schedule in order to fully understand how it affects the amount of your employer match that you will actually receive if you leave your job.

Employees earning high incomes may have different concerns about employee matches. Be careful to spread out your contributions throughout the year. If you reach the maximum contribution limit early in the year, you will miss out on employer contributions for the rest of the year. You can ask your plan administrator for help to ensure that you maximize your employer match.

An Employer Match Is Free Money

One way to appreciate your employer's 401(k) match is to think of it as real money. Say you make $100,000 a year. You contribute 6 percent of your salary on a pre-tax basis, or $9,000. If your employer matches 3 percent, that's $3,000 a year they are adding to your retirement fund. No matter how much you currently earn, a 3-percent match is essentially a 3-percent raise that you are setting aside for later.

Another great 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 IRS. In 2018 you can contribute up to $18,500 in a 401(k) unless you are age 50 or older and can save up to $24,500 with catch-up contributions. With an employer match, you can increase those limits by 3 percent to 6 percent because matching employer contribution limits do not count toward the maximum limits that you can contribute to a 401(k) plan. If you are a highly compensated employee, you can save some serious money for retirement.

So if you are wondering how much to save in your 401(k), start by saving up to the full amount that your employer will match. Anything less is like saying no to that raise you have been waiting for.

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.