Another way to receive money is through a 401k employer match. Everybody, we’re sure, is familiar with this type of 401k contribution since it is very common. In fact, the employer match is usually touted by the employer as the biggest incentive to participate in a 401k plan.
In essence, your employer will match whatever contribution you make to your own account dollar for dollar up to a certain point. Some common formulas used are 100% up to the first 3%, or 50% up to the first 6% of contributions, but really, it all depends.
Let’s say you earn a salary of $39,000 a year. You receive a gross paycheck of $1,500 bi-weekly ($39,000/26).
If you contribute 3% on a pretax basis that means you make a 401k contribution of $45.00 ($1,500*.03) every two weeks. If your employer matches you up to 3% then they also make a contribution of $45 to your account. Now, instead of only getting $45 put into your account, you get a 401k employer match of $90. Not a bad deal!
Note that these formulas are not the only ones an employer can use. They can match whatever they want, so it’s common to see a wide array of matching formulas out there.
Like the profit sharing contribution, this is beneficial to you for a couple of reasons. Again, it’s free money. Still no argument here! Plus, it gives you some incentive to make employee deferrals on your own which will only help your nest egg grow. In other words, you can only get this money if you, yourself, make a 401k contribution to the plan (unlike a profit sharing contribution). So, if you haven’t already done so…get started!
Also, like the profit sharing contribution, your employer can deduct all of its matching contributions from its income tax. While this is a primary driver for them, providing matching contributions is a useful tool in promoting benefits and retaining employees.
Here are some key points to consider about matching contributions:
- It is mandatory. Unlike a profit sharing contribution, an employer MUST make matching contributions if the plan was designed to do so. An employer cannot stop matching simply because the company had a bad year.
- Contributions can be made at any frequency. While it is most common for employers to match employee contributions each pay cycle, this is not always the case. Some employers make matching contributions monthly, quarterly, or even annually.