Why do employers match 401k?

Most employers offer 401(k) plans to their employees to encourage them to save for retirement. Some employers may incentivize this benefit further by offering a 401(k) match to employees. 401(k) match represents an additional contribution to the employee's 401(k) above the regular employee contributions.

Employers may match 401(k) contributions to attract potential candidates and retain top talents. When an employee is faced with two job choices, the 401(k) match may be the deciding factor, and it can help the company attract the right candidates. Employers who offer 401(k) matching may also claim the matching contributions as tax deductions when filing federal taxes.

What is 401(k) employer matching?

401(k) matching refers to the contributions that an employer makes to an employee's 401(k) account. The employer matches the amount that an employee contributes to their 401(k), up to a specific limit.

If your employer offers 401(k) matching, you will receive matching contributions based on the amount you contribute, up to a percentage of your annual salary. For example, if an employee contributes 6% of their paycheck to the 401(k) plan, the employer may be willing to match 50% of the employee’s contributions up to 6% of their annual salary.

For an employee to receive a 401(k) match, they must make periodic contributions to their 401(k). Once you stop making 401(k) contributions or leave the company, you will no longer receive the 401(k) match.

Why employers match 401(k)

An employer may offer a 401(k) match to its employees for the following reasons:

Attract and retain talent

Since 401(k) matching is not mandatory, some employers may match contributions as a way of attracting top candidates to the company. When presented with two job offers, the additional benefit may be the deciding factor.

Also, by structuring the 401(k) match based so that the employer contributions vest gradually over several years, an employer can retain its top talents who may not want to leave the “free money” behind.

Boost employee morale

401(k) matching not only helps attract top talents, but it can boost employee morale. Employees are motivated to work hard to contribute as much as they can to their 401(k) so that they can collect the full match offered by the employer.

Tax deductions

Employers who make matching contributions to employees' 401(k) accounts can claim tax deductions on these contributions. The employer can deduct the matching contributions from their annual federal income tax return, hence reducing their tax bill for the year.

Is 401(k) employer matching mandatory?

401(k) matching is not a mandatory benefit for 401(k) plans. Some employers may offer 401(k) matching as a way of attracting new hires and retaining top talents, while other employers may decide not to offer 401(k) matching to lower its costs.

If an employer offers 401(k) matching, the IRS requires such employers to offer the benefit to all employees, regardless of their income levels. Hence, employers must conduct nondiscrimination tests to ensure the 401(k) match does not favor highly compensated employees to the disadvantage of other employees.

How is a 401(k) match matched?

Regardless of whether you have a traditional 401(k) or Roth 401(k), 401(k) matching contributions go into a traditional 401(k). Employer matching contributions are tax-deferred, and you will only pay taxes on the money when you take a 401(k) distribution.

If you have a traditional 401(k), and your employer matches your 401(k) contributions, both contributions will go into the same retirement account. You won’t pay taxes until you withdraw money from your 401(k).

If you have a Roth 401(k) with your employer, and you receive a 401(k) match, the employer contributions will be deposited in a separate traditional 401(k) account. Although you won’t pay taxes on your Roth 401(k) contributions when you take a distribution, you will pay taxes on the employer contributions when you withdraw the money.

Does my employer match 401(k)?

If you participate in the employer's 401(k) plan but you do not receive a 401(k) match, you should check the plan documents to see if the employer offers additional benefits in its 401(k) plan.

You can also ask the human resource department if the employer offers 401(k) matching and the terms of the match. Ask when new employees are eligible to receive employer matching contributions, and determine how much you can receive based on your contributions.

Some employers may offer automatic enrollment into the company's 401(k) plan, and you might start collecting the 401(k) match after working in the company for a specific period. However, some employers may require new employees to enroll in the plan voluntarily. Once you are eligible to start collecting the 401(k) match, you should check how much you need to contribute to get the full match.