Employer 401k matching programs are smart employee investments because you have the option to maximize your retirement plan contributions for free. Some employers match your own plan contributions dollar-for-dollar, up to a certain percentage. The most common matching percentage a company authorizes is 3 percent of your gross income, although some companies authorize a matching portion on up to 5 percent of your gross income. Once you determine the amount your employer matches on your behalf, you can quickly calculate the amount of free money invested into your 401k plan.
Determine your elective contribution percentage. You may elect to defer any amount of your salary as a 401k contribution, up to the annual limit established by the IRS. As of the time of publication, the annual contribution limit for most employees is $16,500, but most employees select a flat percentage of gross income to contribute each paycheck.
Determine your employer’s match percentage. Your employer may select a matching percentage based on the type of 401k plan maintained by the company and the matching contribution limits. Your employer’s contribution percentage is disclosed on your 401k plan documents.
Apply your company’s match percentage to your gross income for the contribution pay period. For example, if your employer matches up to 3 percent of your gross income, multiply your gross income by 3 percent (.03) or the amount of your personal contribution if you contribute less than 3 percent of your own compensation.
Pay attention to the maximum amount your employer contributes. For example, if your employer contributes a maximum of 3 percent of your compensation and you elect to contribute 6 percent of your compensation, your employer matching portion is still only 3 percent.
- U.S. Department of Labor: 401k Plans for Small Businesses
- FINRA. "401(k) Basics." Accessed March 15, 2020.
- Vanguard. "Stretching the Match: Unintended Effects on Plan Contributions." Accessed March 15, 2020.
- IRS. "How Much Salary Can You Defer if You’re Eligible for More Than One Retirement Plan?" Accessed March 15, 2020.
- IRS. "Retirement Topics — 401(k) and Profit-Sharing Plan Contribution Limits." Accessed March 15, 2020.
- Resource Planning Group. "Does Your Employer Penalize Aggressive Saving? Odds Are, Yes." Accessed March 15, 2020.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.