How a 401(k) Employer Match Works

Translate the sentence into two numbers

Consider a hypothetical promise to match 50% of employee contributions on the first 6% of eligible pay. The employer contributes fifty cents for each qualifying dollar you contribute, until the matched portion of your pay reaches the stated ceiling.

This does not mean the employer contributes 6% of salary. With this formula, contributing 6% produces a maximum match of 3% of eligible pay, subject to the plan’s other terms.

Sources: U.S. Department of Labor: Savings Fitness

Connect the annual example to the paycheck

If the same illustrative pay is spread evenly over 24 checks, each check contains $2,500 of eligible pay. A 6% contribution is $150, and a 50% match on that amount is $75.

The effect on take-home pay depends on the contribution’s tax treatment and other payroll items. Do not assume that a $150 contribution changes the deposit by exactly $150, or that the employer’s $75 appears in your checking account. Read the paycheck and retirement statement together.

Sources: IRS: Retirement plan contributions

Check how much of the employer balance you own

Your salary contributions are fully vested. Employer contributions may vest immediately or under a schedule. The plan’s definition of service and the type of contribution matter.

Suppose an account has $10,000 of employee contributions and $4,000 of employer contributions, ignoring gains and losses. If the employer portion is 50% vested, the vested total is $12,000: all $10,000 of your contributions plus $2,000 of the employer amount.

Sources: IRS: Retirement plan vesting

Ask how the calculation handles changing contributions

Plans can calculate matching on a paycheck basis or use other periods. If you contribute heavily early in the year and then stop, do not assume the employer will automatically make up every match you expected from an annual calculation.

Ask whether the plan makes a year-end adjustment, sometimes called a true-up, and what conditions apply. Also check eligibility dates, the definition of eligible pay, and current contribution limits before changing an election.

1. Read the exact match formula.
2. Check the vesting schedule.
3. Ask about calculation periods and any true-up.
4. Compare the contribution with your paycheck budget.

Sources: IRS: Retirement plan contributions