401(k) Employer Match Contributions Matter

Employers often wonder if they should offer 401(k) matching contributions to their employees and, if so, how much. There isn't one right answer, but we’ve collected what you need to know as an employer about employer match contributions.

Click the links to quickly access the section you’d like to read:

• How Does a 401(k) Match Work?
• Benefits of a 401(k) Employer Match
• What is the Average 401(k) Match?
• What is the Maximum Employer Match?
• Other 401(k) Employer Match Rules and Considerations
• 401(k) Employer Match Communication
• The Ideal 401(k) Match

How Does a 401(k) Match Work?

When a business offers a 401(k) employer match, it means that the employer will match a percentage of their employees’ 401(k) contributions, usually up to a certain percentage of their salary. A typical 401(k) employer match might be between 3% and 6% of an employee’s salary, in which case the employee would receive a contribution of 6% of their salary from their employer after contributing 6% themselves.

There are also variations that can give the employer more flexibility in how they contribute to employee accounts. When thinking about an overall employer match rate, one major factor to consider is how your match style fits with your business goals.

There are three primary ways to implement a 401(k) employer match: 

Determining which option to use for your employer contribution will inform how your match works, and what total amount your employees will need to contribute in order to receive their full match from you.

Benefits of a 401(k) Employer Match

For employers, a 401(k) employer match offers a strong tax benefit. Since 401(k) match dollars are seen as compensation, they will lower an employer’s taxable income for the year, also reducing their tax liability. Also, when it comes to securing talent, 401(k) match can help employers stand out against the competition. Especially in cases where a potential hire is considering more than one offer, employer match could be what tips the scales in one direction over the other.

More than any other financial benefit, employees want 401(k) matching from their employers, with 72.5% preferring employer match over other benefits.¹ There’s also a strong correlation between employees who say they are satisfied with their defined contribution plan (a type of retirement plan in which employees or employers contribute money to individual accounts, like a 401(k) with employer match) and those who intend to stay with their current employer.²

What is the average 401(k) match?

In 2019, the average employer 401(k) match contribution was 4.7% of salary.³ This number reflects a steady rise in average employer matches since 2011, when the average match was between 3% and 4%.

One possible reason for this could be competition for talent. This is especially evident in industries or markets where labor competition is fierce; Microsoft, as an extreme example from the world of enterprise companies, committed in 2016 to matching half of employee contributions up to federal limits as a way to retain their top employees and attract new talent away from the competition.⁴

What is the maximum employer match?

Employer matches are deposited into an employee’s 401(k) account on a pre-tax basis. Although there is not a specific limit to how much an employer can match each employee’s contribution rate, there is a total limit for combined contributions into an individual’s 401(k). Combined contributions from both employer and employee can be no more than $69,000 ($76,500 for those over age 50) or 100% of compensation, whichever is less, for the 2024 tax year.

Other 401(k) Employer Match Rules and Considerations

Beyond the annual combined limits for employer and employee contributions, employer match contributions are subject to some additional employer discretionary contribution rules. Nondiscrimination tests require that employer matches pass the Actual Contribution Percentage (ACP) test, which is designed to see that contributions made to Highly Compensated Employees (HCEs) don’t exceed contributions made to Non-Highly Compensated Employees (NHCEs) by more than 125%. For more information on ACP tests, review this resource from the Internal Revenue Service.

Other 401(k) discretionary contribution rules allow employers some flexibility in how they implement an employer match. Employers are allowed to set up a vesting schedule for employer matches, which means employees will have to put in a certain amount of service before being eligible to collect the full employer match. This can take the form of up to 3 years in a cliff vesting schedule, or up to 6 years in a graded vesting schedule. Finally, employers have the option to require a certain number of hours worked in a year, or to require that employees work on the last day of the year in order to qualify for employer matching contributions.

Additional Business Considerations

• For highly-compensated employees (HCEs), which for 2024 is defined as an employee earning more than $155,000, 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.

Additional Employee Considerations

• 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.

401(k) Employer Match Communication

Whenever you make changes to your 401(k) plan, including any updates you make to your employer match, the plan document needs to be updated and changes need to be communicated to your employees. The Internal Revenue Service (IRS) requires every eligible employee to receive a Summary Plan Description, which details in plain language the specifics of your company retirement plan. When you add or change an employer match, a new Summary Plan Document will include details like:

• New employer match effective date
• Enrollment instructions
• Match rates, including clear information regarding any stretch match arrangements you have made
• Vesting schedules, if applicable

Your 401(k) adviser will typically help update both your plan document and your Summary Plan Description. You can also ask your adviser to help communicate any updates to your employer match during on-site visits and one-on-one meetings with your employees.

The Ideal 401(k) Match

It’s a common misconception among employees that they should only save money into their 401(k) accounts up to the match rate set by their employer. If, for example, you choose to follow a dollar-for-dollar 6% match, some employees might interpret that to be the mark they should aim for when it comes to determining how much they save.

According to some industry experts however, employees should be saving even more than that to be fully ready for retirement—5% early in their careers, 10% later on, and 15% as they approach retirement. This is leading some of those experts—like the author of a National Bureau of Economic Research study—to suggest that a 50% match up to the first 12% of an employee’s salary is a more ideal setup, as it motivates employees to save more and reach that 15% target without actually costing the employer anything more than a dollar-for-dollar 6% match.⁵

Ultimately, you can speak to a 401(k) adviser to discuss your options when it comes to offering an employer match. As you continue to think about the right contribution rate for your 401(k) employer match, remember that your contributions are first and foremost a benefit to your valued employees. Balance the industry averages and data with your goals for both your employees and your business, and you’ll find a contribution rate that’s right for your employees’ needs—and yours.

¹https://www.limeade.com/content/uploads/2016/12/Workplace-Well-Being_FINAL.pdf

²https://www.towerswatson.com/en-US/Insights/Newsletters/Americas/insider/2005/how-do-retirement-plans-affect-employee-behavior

³https://www.cnbc.com/2019/06/10/this-is-the-average-401k-employer-match.html

⁴https://www.wsj.com/articles/u-s-companies-have-a-new-401-k-fix-spend-more-1500283804?mod=trending_now_2

⁵James J. Choi & Emily Haisley & Jennifer Kurkoski & Cade Massey, 2012. "Small Cues Change Savings Choices," NBER Working Papers 17843, National Bureau of Economic Research, Inc.