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 in clutch, 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 the cow.

How Does Employer 401(k) Matching Work?

Even better: This is no fairy tale. In fact, employer matches are pretty common. More than three-quarters of employers with fewer than 1,000 401(k) plan participants offer a match — and that percentage only goes up the bigger the company and the plan.

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?

It means that if you put some money into your 401(k), your employer will put some in, too. It’s a great employee benefit that can help employers attract and retain top talent.

How do 401(k) matches 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 there are two common types of matches:

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%. If you put in more, say 8%, they still only put in 3%, because that’s their max. (But, you know, put in 8% if you can. Compound interest works on your money, too.)

Heads-up that you might see this written in a lot of different ways. “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 a partial match.

Dollar-for-dollar matching

With a dollar-for-dollar match (aka full match, aka 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%, they put in 4%; if you put in 2%, they put in 2%. If you put in 6%, they still only put in 4%, because that’s their max.

Is there a limit?

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

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

A lot of employers use a vesting schedule for their 401(k) matches. 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 actually own, based on how long you’ve worked there. For example, if your employer contributions vest gradually over four years, then 25% of your employer contributions 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, you sacrifice some of that money.)

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. Oh, and don’t worry: 100% of the money you put in yourself is always fully vested.

What 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 the taxes on the traditional when you withdraw the money.

Why always investing to get the full match is so smart

Okay, 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 aimed 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 earning a 50% return on everything you put in (once it’s vested). Fifty percent. That’s kind of amazing. And then, because that itself gets invested in the market, 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.


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