Matching contributions are funds your employer adds to your 401(k) account over and above the amount you defer from your pay. You don't owe income tax on matching contributions, they don't count against your contribution limit, and they compound tax deferred, exactly as your own contributions do.
Your employer may match some or all of your 401(k) contribution. Matching isn’t required, but many employers adopt it to attract employees, encourage plan participation, or benefit from the tax deduction it provides.
Your employer determines how the match is calculated and whether to contribute cash or shares of company stock. One approach is to match 50% of what you contribute up to a percentage of your earnings—usually 5% or 6%. Another approach is to match your contributions dollar for dollar up to a percentage of your earnings—again, usually 5% or 6%.
Here’s an example of how one method might work:
You qualify for matching by participating in the plan. In fact, one of the most persuasive reasons for making your own contribution is that you’ll be eligible for the additional amount. And knowing that your contributions will be matched up to a certain percentage may encourage you to contribute at least enough to qualify for the maximum.
Another way your employer may add money to your 401(k) account is as part of a profit-sharing plan. In these plans, your employer shares the company’s profits with each employee any year that profits are made.
| Active Duty If you leave your job to perform military service, and meet eligibility requirements, the Uniform Services Employment and Reemployment Rights Act (USERRA) requires your employer to continue to contribute to your 401(k) or pension plan. 401(k) plan participants have up to five years to make up missed contributions—and employers must also make up any matching contributions within five years. |
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