401(k) matching: How it works – a guide for employers

Offering a competitive 401(k) match is a valuable benefit that can help businesses attract and retain top talent. However, employers must balance the appeal of a retirement savings plan with cost management. They can start by looking at different match formulas to create a well-structured 401(k) company match benefit that encourages employee participation.

What is a 401(k) match?

A 401(k) match means an employer puts money in an employee's retirement account based on what the employee contributes. Full contributions, partial contributions or a combination of both may be acceptable.

401(k) matching contribution formulas

Full 401(k) match

A full 401(k) match, also known as a dollar-for-dollar match or 100% match, is when an employer matches every dollar an employee contributes to the 401(k) plan up to a certain limit.

Full match example

Employee salary	$60,000
Employer provides 401(k) full match	$1 to $1
Employer matches up to 4% of salary	Employee contributions up to 4% are matched
If the employee contributes 4% of salary	$2,400 is the maximum matched by employer
If the employee contributes 10% of salary	$6,000 is the maximum matched by employer
If the employee contributes 2% of salary	$1,200 is matched by employer

Partial 401(k) match

A partial 401(k) match is when an employer matches a portion of every dollar an employee contributes to the 401(k) plan up to a certain limit. For instance, an employer might match 50% of an employee's contribution up to 4% of their salary.

Partial match example (50 cents on the dollar)

Employee salary	$60,000
Employer provides 401(k) partial match	$.50 to $1
Employer matches up to 4% of salary	Employee contributions up to 4% are partially matched
If the employee contributes 4% of salary	$1,200 is the maximum matched by employer
If the employee contributes 10% of salary	$1,200 is the maximum matched by employer
If the employee contributes 2% of salary	$600 is matched by employer

Full and partial match example

Employee salary	$60,000
Employer provides full match on the first 3%	$1 to $1
Employer provides partial match on the next 2%	$.50 to $1
Employer provides matching on 5% of salary	Employee contributions up to 3% get a full match and the next 2% get a partial match
If the employee contributes 3% of salary	$1,800 is the amount of the full match
If the employee contributes 5% of salary	$1,800 is the amount of the full match $600 is the amount of the partial match $2,400 is the maximum matched by employer
If the employee contributes 10% of salary	$2,400 is the maximum matched by employer
If the employee contributes 2% of salary	$1,200 is matched by employer

Safe harbor 401(k) matching formulas

Companies that offer a safe harbor 401(k) plan must follow one of three matching contribution options designed to meet nondiscrimination requirements automatically. These contributions must be 100% vested immediately.

Basic match option

The basic formula matches 100% of employee contributions on the first 3% of deferred compensation, plus a 50% match on deferrals for the next 2%.

Enhanced match option

The enhanced match formula must be at least as generous as the basic match at each tier of the match formula and can’t be based on more than 6% of compensation. A common enhanced formula is a 100% match on the first 4% of compensation.

Nonelective option

Nonelective contributions, also known as profit-sharing contributions, are provided to all eligible employees. Unlike matching contributions, they are not based on how much employees contribute. The minimum nonelective contribution is 3% (4% in some cases, depending on when the safe harbor contribution option is adopted).

Learn more about safe harbor 401(k) plan matching formulas

Automatic enrollment

Automatic enrollment can help employers pass nondiscrimination testing and improve retirement plan participation rates. It works as follows – the employer automatically deducts a certain percentage (or amount) from each eligible employee’s paycheck and deposits it into the individual’s retirement account. This feature can be added to new or existing 401(k) plans and SIMPLE individual retirement account (IRA) plans. Employees may opt out of automatic deductions at any time.

401(k) vesting schedules

Vesting schedules allow employees to gain ownership of employer contributions after a certain time or gradually over several years. This waiting period entices employees to stay with their employer longer because they may lose unvested retirement benefits if they leave prematurely. As with matching, employers have different vesting options (safe harbor contributions must be 100% vested).

Types of vesting schedules

1. Cliff vesting – An employee becomes 100% vested after a period of no more than three years. For example, in a three-year cliff vesting schedule, employees must wait until they’ve been with their employer for three years to fully own matching contribution benefits.
2. Graded vesting – Ownership of matching contributions is earned gradually over a period of no more than six years. For example, an employer may use a four-year graded schedule to vest 25% of contributions each year, so an employee is fully vested after four years.
3. Immediate vesting – The most attractive and beneficial schedule for employees is immediate vesting. They gain full ownership of matching contributions without a waiting period.

Vesting schedule exceptions

In a traditional safe harbor 401(k) plan, employer contributions must vest immediately. In a qualified automatic contribution arrangement, or QACA plan, employer contributions can be subject to a maximum two-year vesting schedule.

How to communicate the value of 401(k) employer matches

401(k) matching contributions shouldn’t be kept a secret. Employers can broadly promote the benefit to employees and prospective candidates using the following methods:

• 401(k) summary plan description
• Employee communications
• Employee portal or intranet
• Careers website and job descriptions

Plan provider tools, like ADP’s My ADP Retirement Snapshot calculator, can also help educate employees. It estimates an employee’s retirement savings needs and the monthly amount required to reach them.

Employee 401(k) contribution limits

The IRS reviews and updates the maximum 401(k) contribution limits every year. The latest figures are as follows:

Employee pre-tax and Roth contribution limits

The 2024 contribution limit for employees is $23,000. It includes all elective employee salary, deferrals and any contributions to a Roth account or 401(k) retirement plan.

Total contribution limits (including employer contributions)

The limit on total employer and employee contributions for 2024 is $69,000.

Catch-up contribution limits

Workers aged 50 and older can add up to $7,500 more annually as a catch-up contribution in 2024.

Beginning in 2025, catch-up limits are increasing for 401(k) plan participants ages 60 to 63. They’ll be able to contribute the greater of $10,000 or 150% of the regular catch-up amount. This change was set forth in the SECURE 2.0 Act, which is intended to help older workers make a comfortable retirement more attainable.

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