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To Match or Not to Match

by Caldwell Trust

developing-company-401k.jpgWhen it comes to developing your company’s 401k, there’s a lot that needs to be determined. But while you’re deciding whether or not your plan will accept 401k rollovers and how to charge employees fees in a way that’s fair, you also need to consider whether or not you’ll make an employer contribution. Your company isn’t legally obligated to do so, and that means you need to know if matching employee contributions is beneficial to your business.

What Employer Matching Is

Quite simply, when companies contribute to an employee’s 401k, they do it by contributing an amount of money based on the employee’s own annual contribution. That is to say, the employer “matches” a certain amount of money that the employee contributes. This is often done using a percentage algorithm, but it may also be a flat rate. As we mentioned, employers aren’t required to offer contribution matching; however, there is a limit on the maximum amount of contribution imposed by the IRS. In 2017, that amount was raised to $54,000, barring catch-up contributions.

How Many Businesses Make Matches and How They Match

On average, more than half of employers that offer a 401k (51%) will provide some kind of contribution matching, but that average may drop by 20% when looking at small businesses alone. The median matching contribution is 3%, but about 10% of businesses will match 6% or more. More than half of businesses offering a 401k (56%) require employees to contribute 6% or more to receive the full benefits of employer matching, 42% of them elect to match dollar-for-dollar. The average match is 50 cents on the dollar for up to 6% of the employee’s contribution.


There’s also no standardized way of offering matched contributions. If you allow new employees to start contributing to their 401k with their first paycheck, you could also begin matching with their first check — 46% of businesses did as of 2015. You could also put a vesting schedule in place that requires an employee to work for one year before matching begins (29%), while still others require three years of service. Some 22% of plans use cliff vesting schedules (i.e., they require the employee to stay for a minimum number of years before they earn the match), while 47% use graded vesting schedules (i.e., slowly vesting the match until reaching 100%, usually at five years of employment).

The Pros and Cons of Matching

The only real drawback to matching employee contributions is the actual financial contribution. Your business has to have the money available to make the match, after all, and many businesses don’t want to make that investment. Some businesses simply feel they cannot afford to make that kind of investment. However, it’s worth taking a fresh look at what your business is capable of contributing.


That’s because there are two major benefits to providing matched contributions. First of all, any employer contribution made this way is tax-deductible. That directly mitigates much of the negative financial impact. Secondly, matched contributions is a major draw for top talent. Potential hires view the 401k plan you offer as an indication of how you value your employees and will compare 401k plans when making their decision about who to work for.


When it comes down to it, matching employee contributions is a great way to help employees save for retirement. It may seem costly, but in the long run, offering an employer contribution represents great benefits for your business as well.


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