401(k) Basics: What Are Matching Contributions?
Copyright (c) 2014 Joe Maas
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 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.
A vesting schedule is a popular tool used by employers to encourage employee retention. For example, if your employees are 100 percent vested from the moment they enroll in the plan, this means that they can quit any time and can walk away with any of the money you've contributed thus far. By setting up a vesting schedule, you encourage them to stay within the company, at least until they are fully vested. If they leave sooner, you retain the unvested portion of their matching contributions.
If you put them on a vesting schedule of five years, for example, the money that you've contributed gradually belongs to the plan participant over time. If the employee quits after the third year, she might receive only 60 percent of what you've contributed. She won't be 100 percent vested until the five years are up.
If your company already has a 401(k) plan with a matching contribution, consult your plan document or ask your plan provider to explain the parameters of the plan. If you want to create a 401(k) retirement plan for your company, or want to add matching contributions as a plan feature, contact an experienced 401(k) expert for assistance.
About the Author
Learn more about 401(k) profit sharing and matching contributions by contact the 401(k) experts at Synergetic Finance in Seattle. Visit them at http://synergy401k.com or http://synergy401k.com/blog to request a free cost comparison or 401k plan analysis.
Tell others about
this page:
Comments? Questions? Email Here