A 401k plan is a defined contribution retirement plan offered by employers. It is easy to administer and can be drafted to allow employers and employees alike to contribute to the plan. Often, as a means to attract employees, employers will offer matching contributions to their 401k plans.
What Is a Matching Contribution?
A matching contribution is an employer contribution to an individual’s 401k plan. Matching contributions are voluntary, and employers may design their plans to include or exclude matching contributions. If employers choose to include matching contributions in their 401k plans, they are free to structure their matching contributions in any manner, provided they are not discriminatory.
What Percentage Match is Typical for a 401k?
While employers are free to establish and draft their 401k plans within federal limits, the 401k Help Center website notes that the most common type of matching contribution in 2011, offered by 27 percent of the studied companies, was dollar for dollar. Most commonly this match was given up to 6 percent of an employee’s pay. About 23 percent offered a matching contribution of 50 cents per dollar, again up to a specified percentage of pay, most often being 6 percent.
Although companies may establish the terms of their plans within the parameters of federal law, a 401k matching contribution may not discriminate or have the effect of discriminating in favor of highly compensated employees. In general, a highly compensated employee is one who earned over $110,000 during the year.
2011 401k Limits
There are federal limits as to the amounts employers and employees may contribute to their 401k plans. These limits are adjusted on an annual basis to reflect cost of living increases. In 2011, the amount that may be contributed by both the employer and the employee cannot exceed the lesser of 100 percent of the employee’s compensation or $49,000. These limits do not include earnings on the account balance.