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How Does Employer 401(k) Matching Work?

By Ellevest Team

An employer 401(k) contribution match is (in our opinion) one of the best perks going. An employer match is literally free money … and with our good friend compound returns coming into play, it can make a serious difference in how much money you’ll have when you retire. It’s kind of like being given magic beans without having to sell your cow.

Two women’s hands holding fans of cash, one coming in from the top and one coming in from the bottom.

Even better: This is no fairy tale. In fact, employer matches are pretty common. One estimate found that 98% of companies that offer employees a 401(k) plan also match contributions in some form.

If your employer offers a 401(k) match, here’s what you need to know.

401(k) match FAQs

What is a 401(k) contribution match?

Simple: When you put money into your 401(k), your employer will put some in, too — their contribution “matches” yours, either completely or in part. It’s a great employee benefit that can help employers attract and retain top talent.

How does a 401(k) employer match work?

Every 401(k) plan is different, so you’ll have to check your employer’s plan for the details on exactly how yours works. But these are the two common types of matches (plus an example or two, for math reasons):

Partial matching

Your employer will match part of the money you put in, up to a certain amount. The most common partial match provided by employers is 50% of what you put in, up to 6% of your salary. In other words, your employer matches half of whatever you contribute … but no more than 3% of your salary total. To get the maximum amount of match, you have to put in 6% of your salary. If you make $50,000, for example, and you decide to contribute the full 6%, that would be $3,000 a year — usually taken out gradually, with each paycheck — and then your employer would contribute half of that, or $1,500. If you were to put in more — say 8% — your company would still only put in 3%, because that’s their “up to” number, aka their max. (But, you know, put in 8% if you can. Compound interest doesn’t discriminate.)

Note: You might see the same employer match written in a lot of different ways. So “50% up to 6%” might also be phrased as “50 cents on the dollar up to 6%,” “50% on the first 6%,” “3% on 6%” — you get the picture. All various ways to describe the same partial match.

Dollar-for-dollar matching

With a dollar-for-dollar match (aka a full match or 100% match), your employer puts in the same amount of money you do — again up to a certain amount. An example might be dollar-for-dollar up to 4% of your salary. In this case, if you put in 4% — in our example, 4% of $50,000 would be $2,000 — they put in 4% — also $2,000. If you put in 2%, they put in 2%. If you put in 6%, they still only put in 4%, because 4% is their max.

Are there contribution limits for 401(k) matches?

In 2022, the IRS limits employees’ personal 401(k) contributions to $20,500 a year ($27,000 if you’re over 50). Employer match contributions don’t count toward the personal contribution limit, but there is a limit for combined employee and employer contributions: As of 2022, it’s either 100% of your salary or $61,000 ($67,500 if you’re over 50), whichever amount is lower.

What’s this whole employer match “vesting” thing?

A lot of employers use a vesting schedule for their 401(k) matches. (One survey found that just 41% don’t use them.) It’s a way to help them hedge their bets on you as an employee by reducing the amount of money they’d lose if you were to leave the company. It’s also meant to give you a shiny incentive to stay.

A vesting schedule determines how much of your employer’s matching contributions you permanently own, based on how long you’ve worked there. Think of it as your employer’s contributions, which are still being deposited regularly, going into your account with literal strings attached — when a portion of their contribution “vests,” they cut the string on that amount, and it’s yours, never to be yoinked back. 

For example, say your employer contributions vest gradually over four years. 25% of whatever your employer has contributed belongs to you after you’ve been there one year, 50% belongs to you after two years, 75% belongs to you after three years, and they’re all yours once you hit your fourth work anniversary. (If you leave before then, they take back whatever percentage hasn’t vested — see aforementioned yoinking.)

There’s another type of vesting schedule, called “cliff vesting.” This one’s more of an all-or-nothing scenario. With a four-year cliff, 0% of the contributions are yours until you hit your fourth workiversary, then 100% of them are all yours, all at once.

All the contributions made after your vesting schedule ends are usually fully vested right away. Same goes for any returns your employer’s contributions might have earned while in your account, even if you leave early before the full match amount(s) can vest. Oh, and don’t worry: 100% of the money you put in yourself is always fully vested.

How does 401(k) employer matching work if I have a Roth 401(k)?

If you have a Roth 401(k), you pay income taxes on your contributions now, rather than when you take that money out during your retirement. But your employer isn’t likely to pay the taxes on matching contributions (it’s your income, after all), so if you have a Roth, their matching contributions usually go into a separate, traditional (aka pre-tax) 401(k). You’ll pay taxes on the traditional when you withdraw the money.

Why it’s smart to always invest to get the full match

OK, you probably have a lot of different money goals (hello, house with sauna), and retirement might feel a long way off. But consider this: The stock market has historically earned an average return of 10% a year. The key word here is “average.” In any given year, it might be more, it might be less. There’s risk involved. At Ellevest, we assess your risk and recommend an investment portfolio designed to get you to your goal in 70% of market scenarios or better (and never just in stocks, btw) — but still. Risk.

On the other hand, with an employer match of 50%, you’re basically earning a 50% return on everything you put in (once it’s vested). Fifty percent. That’s free money. Kind of amazing, no? Better yet because that itself gets invested in the market along with your own contributions, your 50% gets the chance to earn even more returns — compounded. In case you’re counting, that’s returns on returns on returns.

And here’s the situation: Grabbing that match is even more important for women, because the data shows that we’re behind as it is — women retire with two-thirds as much money as men (and live six to eight years longer, btw). So this is one opportunity you usually want to jump on.

Ready to jump in? Check in on your retirement plan with a CFP® professional, or come to our next live workshop on planning for retirement.


Disclosures

© 2018–2022 Ellevest, Inc. All Rights Reserved.

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

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Ellevest Team

The Ellevest team is working to help women reach their financial and professional goals.