401(K) Basics: What Are Matching Contributions?
Employers have a number of options when it comes to contributing to their 401(k) plans. You can make a profit sharing contribution by depositing a flat monthly fee to each participant’s account or by contributing a certain percentage of an employee’s salary to his retirement account. Profit sharing contributions are subject hk mpf contribution to discrimination testing annually to be sure that highly compensated employees do not benefit unfairly.
Another option is to match the amount your employee decides to contribute, which is currently limited by the U.S. government to 15% of the employee’s total gross salary. For example, Tommy Anderson contributes 2% of his salary each year, up to the current maximum of $17,500. The employer can match dollar for dollar, up to 15% of the employee’s salary.
What is a matching contribution? Matching an employee’s own contribution simply means that the plan sponsor, or the employer, agrees to kick in additional money for every dollar the employee contributes to his own retirement plan, usually within pre-determined limits outlined in the plan document.
The standard match for companies is 50 percent up to 6 percent of salary. That means for every dollar your employee contributes up to 6 percent of pay, you will contribute fifty cents, increasing your employees’ returns by 50 percent. This benefits the employee by increasing her retirement savings, but it also benefits you because you reward employees while also containing your costs.
If you do decide to offer Matching Contributions, you can do so on a vesting schedule. That means your contributions become the property of the employee over time. A common vesting schedule is 20 percent per year for 5 years. That means that after one year of service, the employee’s matching contribution is vested 20 percent; after two years of service, 40 percent; and so on. Note: an employee’s own contributions are always 100 percent vested.