When do companies match 401k?

If your employer offers a 401(k) match, you will receive matching contributions based on the amount you contribute to your 401(k). Generally, an employer can match an employee's contributions up to a specific dollar amount. The 401(k) match provides a generous incentive to encourage employees to maximize their contributions.

Most employers match employees’ contributions each payday when employees receive their paycheck. Some employers may also make a single lump-sum payment at year-end as an alternative to payday matching. Employees qualify to receive the lump-sum match as long as they made periodic contributions during the year.

Payroll Matching vs. Lump-sum Matching

When matching contributions, employers can choose to match 401(k) contributions every payday or make one lump-sum match per year.

Payroll matching is the most common matching formula that employers use. In this case, the employer matches the employee’s contributions in each pay period, or with each paycheck. If you contribute to the 401(k) plan during the payroll period, the employer will make matching contributions to your 401(k) for that period. However, if you make contributions outside the payroll period, you won’t get the 401(k) match.

Lump-sum matching occurs when the employer matches contributions once a year as a lump-sum instead of every pay period. In this case, employees get matching contributions as long as they contributed to their 401(k) during the year, regardless of the number of times they contributed. Some large employers with tight budgets have shifted from per period matching to lump-sum matching as a cost-saving measure.

Lump-sum matching gained popularity when AOL’s CEO announced that the company was switching from payroll matching to a single lump-sum matching. However, AOL’s announcement received backlash from the public, forcing it to rescind its decision. By holding off the matching contributions until the end of the year, lump-sum matching denies employees the benefits of dollar-cost averaging and compounding interest.

401(k) match limit

The IRS limits employee contributions to $20,500 in 2022, or $27,000 if you are above age 50. 401(k) matching contributions do not count in this limit, but there is a limit that the combined employee and employer contributions should not exceed.

For 2022, the total contribution to all 401(k)s should not exceed 100% of your compensation, or $61,000, up from $58,000 in 2021. The combined contribution limit for workers above age 50 goes up to $67,000.

The annual contribution limit is updated each year, and you should watch out for the new IRS limits for the following year in October/November of the current year.

401(k) matching contribution

The sponsoring employer determines the terms of each 401(k) plan, and they are guided by the ERISA Act. An employer must determine the match formula it will use or even decide not to offer matching contributions to its employees.

If you don’t know whether your employer matches employee contributions, you should check the plan document to know if your employer offers 401(k) matching, and when it makes matching contributions. As long as the employer offers a match, you should contribute enough not to leave free money on the table.

Employer matching contribution formula

Every 401(k) plan is different, and each employer may adopt a different formula for matching contributions. The two main formulas that employers use include:

Partial matching

If an employer uses partial matching, it means the employer matches part of the money you contribute to a 401(k) up to a specific limit. The most common partial matching formula that employers use is 50% of the employee's contributions, up to 6% of salary. This means the employer will match half of what you contribute, but not more than 3% of your salary. For example, if you contribute 6% of your salary, your employer will put in 3%.

Dollar-for-dollar matching

Dollar-for-dollar matching is also known as full match, and the employer puts in a dollar for every dollar you contribute up to a certain amount. For example, if the employer offers dollar-for-dollar matching up to 5%, it means the employer will match an employee’s contributions up to 5% of their salary. An employer can also choose to match employee’s contributions for the first $5000 of contributions.

401(k) Vesting

The IRS allows employers to use vesting schedules to specify at what time the matching contributions fully belong to you. Vesting schedules determine how much of the matching contributions an employee owns, depending on how long they have been in the company.

For example, if a company has a five-year vesting schedule, it means an employee will own 40% of the employer's match in the second year, 80% in the fourth year, and they will become fully vested by the fifth year. Employees also get to keep 100% of the money they contributed over the year while working for the employer.