How Does 401(k) Employer Match Work? (2024)

How Does 401(k) Employer Match Work? (1)

One of the easiest ways to save for retirement is to contribute to your 401(k). Set up through your employer, a 401(k) allows you to set aside a certain amount of each paycheck before income taxes apply. Sometimes, your employer can also contribute to your 401(k) through an employer match program. This program can significantly boost your retirement savings, and if your employer offers matching, there’s very little extra work you need to do to snag this perk.

Consider working with a financial advisor as you develop or modify your retirement savings plan.

How Does 401(k) Match Work?

It’s important to note that employer matching usually doesn’t mean that your employer will match 100% of your contributions. Rather, your employer typically has a cap to how much they’ll contribute. This amount can be expressed as a dollar amount, a percentage of your salary or a percentage of your own contribution. Your contributions could be capped at 6% of your salary, for example.

One way your employer could contribute to your 401(k) is by matching 100% of your contribution up to the cap. If we stick to the original example above, your employer match will max out at 6%. So if you, for example, contribute 5% of your salary to your 401(k), your employer will contribute the same amount.

As employer matching is effectively free money, most experts will tell you to make sure you contribute enough to max out the match. In this instance, that means contributing at least 6% to take full advantage of your employer’s match program. However, you should only increase your contribution if you’re safely able to do so without hurting your current financial situation.

Of course, not all employers will match your contribution dollar for dollar. Some may “match,” say, 25% of your contribution. If you contribute that same 5% of your salary, your employer will only be contributing 1.25% of your salary to your 401(k). Here, too, there’s likely to be a cap on contributions.

Employer Match with a $40,000 Salary (Example)

Employer Match Plan	Employer Match Maximum	Your Contribution	Employer Match Contribution	Contribution Needed to Meet Employer Match Maximum
100%	6% of Salary ($2,400)	$1,200	$1,200	$2,400
50%	6% of Salary ($2,400)	$1,200	$600	$4,800
25%	6% of Salary ($2,400)	$1,200	$300	$9,600

Do I Qualify for 401(k) Employer Match?

How Does 401(k) Employer Match Work? (2)

Your eligibility for employer 401(k) matching depends entirely on your employer. Not all employers offer a match program. According to statistics from the Bureau of Labor Statistics in 2015 (the most recent statistics available) around 51% of companies with a 401(k) offer some sort of match.

401(k) Matching Average and Contribution Limits

On average, companies that offer matching will match up to around 3% of an individual employee’s pay.

Regardless of your employer’s match, however, you should still do your best to contribute some of your pay to your 401(k). Not only will that lower your tax liability, it will give you a source of income once you hit retirement. Experts recommend saving between 10% and 20% of your gross salary toward retirement.

The total amount can be split between your 401(k) and other retirement accounts you may have, or you might keep all of that in your 401(k). Be sure to keep yourself on track throughout the work years, checking whether you’re meeting your age group’s average 401(k) contribution numbers or not.

Also always keep in mind that the IRS does put limits on how much you can contribute to your 401(k) each year. For 2024, you’re allowed to contribute a maximum of $23,000, up from the 2023 limit of $22,500. If you’re 50 or older, you can contribute an additional $7,500 a year. However, your employer’s match does not count toward that 401(k) limit.

Bottom Line

How Does 401(k) Employer Match Work? (3)

Employer 401(k) matching is essentially free money that you can easily benefit from. There are typically no extra hoops you need to jump through to qualify. Be sure to check with your company to see whether it offers a match. Also see whether you need to enroll manually, how much you need to contribute to max out the match and what kind of vesting schedule applies. Employer matching can provide a great boost to your retirement savings, so make sure you’re informed of the details and taking full advantage.

Tips on Saving for Retirement

Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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