What is a Matching Contribution?

Is a Matching Contribution Right for My Business?

Many employers that offer their employees a company-sponsored 401(k) also offer a company match, or matching contribution. When an employee contributes money to their 401(k) account, an employer may also contribute money to that employee’s account, matching their contribution. So how does it work, and why might a business offer to match their employees’ 401(k) contributions?

From the Business Perspective

Employers are not required to match employee contributions (also known as an employer match), but may include them as part of a benefits package meant to attract higher quality workers. A majority of U.S. workers see retirement benefits as the second most important part of the benefits equation, according to a 2015 Transamerica Center for Retirement study. From a business perspective, how does an employer match work?

  • There’s a wide range of company match types, ranging from a percentage of employee contributions for a certain amount of their salary to a straight match of all employee contributions.
  • For example, an employer match might be: The employer matches 100% of employee contributions for the first 5% of their salary. After the employee contributes more than 5% of their salary, they can continue to put money into their retirement account—but per employer rules, the company will not contribute more money to that individual’s account.
  • Some companies may match employee contributions dollar for dollar up to a certain amount. In some rarer cases, employer match contributions are only limited by IRS rules. For 2016, the absolute maximum for both employee and employer contributions is $18,000 for a 401(k) account, and $53,000 when combined with a profit sharing program.
  • For highly compensated employees, which for 2016 is defined as an employee earning more than $120,000, employer contributions may be limited.
  • The business owner can set a “vesting schedule” for their employees to receive their matching contributions, which means the business can decide if their matching contributions are given to the employee right away, or if it’s earned after working for a specific amount of time.
  • Employer contributions to employee 401(k) accounts are considered a business expense, and can help lower your business’s tax bill.

From the Employee’s Perspective

From an employee perspective, a matching contribution can be a major boost to their retirement accounts—a perk for working for certain companies. The match increases the funds in the employee’s retirement account without increasing their tax bill, because deferrals made to a retirement account are not taxed until they’re withdrawn in retirement. Therefore, a company match can greatly increase the value of an employer-sponsored 401(k) plan.

  • Employees should be aware of their contribution limits as they pertain to an employer match, as well as whether a vesting schedule exists. These two things can help an employee maximize the matching contributions they receive from their employer.
  • Employees should also be aware of how those matching contributions may be forfeited—if their employment ends, for instance, either voluntarily or involuntarily. Contributions made by the employee are always 100% vested at all times and cannot be forfeited.
  • Some employer matches come in the form of company stock. However, having a diverse portfolio and wide array of investments is considered a wise decision, and is practiced by many financial experts. Some experts recommend keeping no more than 5% to 10% of total assets in company stock.

If you would like to learn more, feel free to contact us and find out how Fisher Investments 401(k) Solutions can help your business.

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