What Is a Matching Contribution?

A matching contribution is a type of contribution that an employer chooses to make to their employees’ employer-sponsored retirement plan. Put simply, a matching contribution is an amount of money that an employer chooses to make to participating employees' retirement plans offered by the company. This amount is typically a percentage of the employee's contribution or the elective-deferral contributions they make.

How Matching Contributions Work

Generally, the employer’s contribution may match the employee’s elective-deferral contribution up to a certain dollar amount or percentage of compensation. For example, an employer might match 50% of an employee’s contribution.

It often takes several years or a vesting period for this benefit to begin. When an employee is vested, then they legally own the money that their employer has contributed to their 401(k) or other retirement accounts. If an employee leaves the company, they will lose the right to claim any matching contribution funds in which they are not yet fully vested.

Vesting also has strong ties to employee retention. Stock bonuses, for example, can entice valued employees to remain with the company for several years, particularly if the company is promising and might be acquired or go public in the coming year(s), which would mean that the employee’s stock would multiply in value.

In some cases, vesting is immediate. For example, employees are 100% vested in Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) employer contributions. When it comes to a 401(k), a cliff vesting or graded vesting schedule may escalate toward a fully matched contribution. Employers should make the vesting schedule available to employees along with information about the 401(k) plan.

Special Considerations

Earnings in a 401(k) plan accrue on a tax-deferred basis. This means that within a given year, an employee will not have to pay taxes on these funds. When they withdraw the amount at 59½, the eligible retirement age, they pay ordinary income tax if the initial contribution is pretax. If the employee withdraws funds prior to age 59½ for a non-qualified reason, they could incur a 10% penalty.

Because of compounding, the longer these funds stay in retirement accounts, the more valuable they become. But the Internal Revenue Service (IRS) requires people to start withdrawing money at a certain point, as the U.S. economy needs to keep enough of these funds in circulation. These withdrawals are called required minimum distributions (RMDs).

A new law called the SECURE Act 2.0 was passed in December 2022, raising the age at which RMDs must begin. Anyone who turns 73 on or after Jan. 1, 2023, must begin taking these withdrawals beginning April 1. Individuals who are 72 on or before Dec. 31, 2022, are still required to take their RMDs at that age, as per the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Prior to this, the age for taking RMDs was set at 70½.

Matching Contributions and Retirement Savings

Individuals have several options when saving for retirement with or without an employer’s matched contributions. They can contribute to their own individual retirement account (IRA) or Roth IRA, along with a company’s 401(k) plan. For smaller companies, SEP and SIMPLE plans could be more effective.

However, the most common form of a matched contribution occurs in a 401(k) plan. These are qualified employer-sponsored retirement plans that employees contribute to on a post-tax and/or pretax basis. Employers may make matching or non-elective contributions to the plan on behalf of eligible employees and may add an additional profit-sharing feature.

• Employer Matching Contributions to a Roth 401(k): Under SECURE Act 2.0, employees have the option to receive all or some employer-matching contributions in their after-tax-funded Roth 401(k). Prior to this, employer matching contributions were only paid into an employee’s pretax 401(k) account.
• Student Loan Matching: Employees using their wages to pay off student loans rather than save for retirement can get matching contributions on these payments, boosting their retirement fund without contributing to it.