How 401(k) Matching Works

An employer match is when your employer contributes a certain amount to your retirement savings plan based on how much you contribute. Though the details vary—some companies match dollar-for-dollar up to certain percentage of your salary, for example—what you need to know is that it's an important benefit that can boost your savings considerably. Not taking advantage of an employer match is like leaving free money on the table.

Employer Match: How Much and When

Depending on the terms of your 401(k), your contributions to your retirement savings plan may be matched by your employer in several ways. Typically, employers match a percentage of an employee's contributions up to a specific portion of their total salary. Occasionally, employers may elect to match employee contributions up to a certain dollar amount, regardless of employee compensation.

"Your employer could match 100% or even a dollar amount based upon some formula, but this can get expensive and normally owners want their employees to take some ownership of their retirement while still providing an incentive," says Dan Stewart, CFA®, president, Revere Asset Management Inc., in Dallas, Texas.

Your employer may elect to use a very generous matching formula or choose not to match employee contributions at all. Some 401(k) plans offer more generous matches than others.

According to Vanguard, the average employer match amounts to 4.6% of compensation, and the median (middle-of-the-road) match is 4.0%. The highest match recorded was over 7% of compensation. The most common formula was $0.50 per dollar on the first 6% of compensation.

Whatever the match is, it amounts to free money added to your retirement savings, so it's typically a good idea to take advantage of it if offered.

How Matching Works

Let's get into this with a few examples.

Assume your employer offers a 100% match on all or your contributions each year, up to a maximum of 3% of your annual income. If you earn $60,000, the maximum amount your employer would contribute each year is $1,800. To maximize this benefit, you must also contribute $1,800. If you contribute more than 3% of your salary, the additional contributions are unmatched.

A partial matching scheme with an upper limit is also common. Assume that your employer matches 50% of your contributions, equal to up to 6% of your annual salary. If you earn $60,000, your contributions equal to 6% of your salary ($3,600) are eligible for matching. However, your employer matches 50%, meaning the total matching benefit is still capped at $1,800. Under this formula, you must contribute twice as much to your retirement to reap the full benefit of employer matching.

If your employer matches a certain dollar amount, you must contribute that amount to maximize benefits, regardless of what percentage of your annual income it may represent.

Contribution Limits

Employee Alone

All contributions are subject to an annual limit set by the Internal Revenue Service (IRS), regardless of whether contributions to your 401(k) come from you and/or from your employer. These figures are updated each year to keep pace with inflation.

What follows are the limits for how much an employee can contribute, depending on their age. Note: The amount that an employer contributes doesn't count toward this limit.

If you're under 50, you can contribute up to $23,000 in tax year 2024, up from $22,500 in tax year 2023.

The IRS allows those who are 50 or older to make catch-up contributions in addition to their normal contribution. These are designed to encourage employees nearing retirement to bulk up their savings. The catch-up contribution amount is $7,500 in 2024, the same as 2023. So for those who are 50 or older, the limit for 2024 is $30,500 (it was $30,000 in 2023).

Employee and Employer Combined

The total contribution amount allowed for all 401(k) accounts held by the same employee (regardless of current employment status) is $69,000 in 2024 or 100% of compensation, whichever is less. That's $3,000 higher than the 2023 limit of $66,000. If you're 50 or older, you can make up to an additional $7,500 in catch-up contributions, bringing that total to $76,500 for 2024 (from $73,500 for 2023).

401(k) Vesting Schedules

In addition to reviewing your 401(k) plan's matching requirements, educate yourself about your plan's vesting schedule. A vesting schedule dictates the degree of ownership you have in employer contributions based on the number of years of your employment.

Even if your employer has a very generous matching scheme, you may forfeit some or all of those contributions if your employment is terminated—either voluntarily or involuntarily—before a certain number of years has elapsed.

Any contributions you make to your 401(k) account yourself are 100% vested at all times and cannot be forfeited.

"A typical schedule gives an employee a percentage of ownership that steadily increases in lock-step with the employee's tenure. According to the Bureau of Labor Statistics, the average number of years to be fully vested is five," says Mark Hebner, founder and president of Index Fund Advisors Inc., in Irvine, California, and author of The 12-Step Recovery Program for Active Investors.

The Bottom Line

An employer may or may not offer the benefit of matching. If yours does, though, it's typically wise to try your best to contribute what's needed to get as much of these additional funds as you can. By doing so, you can boost your savings for years to come.