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How Exactly Does Employer 401(k) Matching Work?

When it comes to saving for retirement, taking advantage of matching employer contributions can build your 401(k) account.

Chris Scott

Contributing Writer at Tally

December 13, 2021

If you're looking to save for your later years, you may be wondering how to maximize contributions to your retirement accounts. One way is through 401(k) matching. 

Many employers will match employee contributions up to a certain percentage. An employer's matching contributions are essentially free money that you receive on top of the wages you already earn. 

But how does 401(k) matching work? In addition to answering this question, we'll address:

  • What a 401(k) is

  • What 401(k) matching is 

  • Why you should take advantage of it

What is a 401(k)? 

A 401(k) is a type of retirement account. When you sign up for a 401(k), you select the percentage of your paycheck that you'd like deposited into it. Typically, you'll find that there are two primary types of 401(k)s available:

  • Traditional 401(k). If you elect a traditional 401(k), your employee contributions are deducted from your pre-tax/gross income — before calculating taxes. This deduction reduces your taxable income for the year, as you can take the contributions as an income tax deduction. You won't have to pay taxes on your contributions until you withdraw from the fund. 

  • Roth 401(k). If you choose a Roth 401(k), your retirement contributions are deducted from your net income after taking out taxes. You won't receive a tax deduction that year. However, the money grows tax-free, and you won't have to pay taxes when you withdraw funds at retirement. 

Statistics indicate about 60 million Americans actively participate in 401(k) plans. Choosing between a traditional and a Roth 401(k) can depend a lot on your personal finances and retirement plan. Speaking with a trusted financial planning advisor can help you determine which is best for you. 

What is 401(k) matching? 

401(k) matching occurs when an employer matches a certain amount of your contributions to your retirement account. As we'll detail below, there are a few different ways employers can offer matching funds. 

Nothing states that a company match program is required. Employer 401(k) matching is a perk on top of your employee salary. Read your company handbook or speak with a supervisor to understand how matching contributions work at your company. 

How does 401(k) matching work? 

A few different scenarios could occur if your employer offers 401(k) matching. Some of the matching formulas that your employer may use include: 

  • A single-tier formula: The employer pays 50% or 100% of every dollar up to the first X% of your contributions. This is known as partial matching. 

  • A multi-tier formula: The employer pays 100% of every dollar up to the first X% of contributions. Then the employer pays 50% on the next Y% of contributions. 

  • A dollar cap: Employers match dollar-for-dollar up to a certain amount. 

In addition to the above, there are matching scenarios based on things like age, job position or tenure.

You need to make the minimum contributions to get the most of your employer match. Let's say that your employer will match 100% of your contributions up to 6% of your salary. If you elect only to contribute 4% of your annual income, your employer will likely only match up to 4%. To get the most out of your employer match, your minimum annual salary contributions should be the maximum threshold set by your company (i.e., 6% in the example above). 

Additionally, you should be mindful of your employer's vesting schedule, which defines the period of time it takes for you to have complete control over your employer contributions. This is a tool that employers use to retain employees. 

For example, your employer may define the vesting period as four years. After four years, you’re entitled to 100% of the contributions your employer made on your behalf. If you leave the company before this time, you may only be entitled to a certain percentage. For instance, only 50% of your employer contributions may vest if you leave after two years. 

You should also be aware of when your employer contributes to your account. They could pay: 

  • Every pay period 

  • ​Biweekly

  • Annually

  • Weekly

  • Quarterly

  • Monthly

You likely won't have much say when the contributions are made on your behalf. Just remember that the is to get the money into your account as soon as possible. Consider having your employer make the matching contributions every pay period if you can choose. 


Why should you take advantage of 401(k) matching? 

Taking advantage of employer matching puts free money toward your retirement income. Let's say that your employer offers a dollar-for-dollar match on up to 3% of your salary. You make $1,500 per week and contribute 3% to your retirement plan, which is $45. Because your employer offers a full match up to 3%, your employer will contribute another $45 to your retirement account. You’re essentially doubling your contributions. If you do this for a number of years, you can significantly you have in your account when you retire. 

Your employer’s contributions to your 401(k) are also beneficial because they don't count against the IRS' annual contribution limits. There are limits on how much you can put into your retirement account each year. In 2020 and 2021, those limits were $19,500 per employee, and in 2022, it will increase to $20,500. This is the that you can put into your 401(k) each year. 

However, your employer match doesn’t count toward this dollar amount. So, let's say that you max out your contributions in 2022. Through your matching program, your employer contributes another $4,500. Instead of putting $20,500 into your account, you end up putting $25,000 into your account. Your employer match allows you to circumvent the total contributions limit set by the IRS. 

401(k) matching can set you on the path to financial freedom 

If you're looking to boost your retirement savings, one of the strategies you should strongly consider is 401(k) matching. A 401(k) match is something offered by employers to incentivize the use of retirement plans. It's important that you speak with your employer directly to better understand if they offer 401(k) matching as an employee benefit and, if so, what matching formula they use. 

Of course, a 401(k) isn't the only way to save for retirement. You can also look into other investment options like an IRA or consider using a savings account.

One way to free up cash for your retirement plan is by saying goodbye to debt. Paying down debt saves you money on interest, allowing you to put more into savings. If you need a hand tackling your credit card debt, †. Tally is a credit card payoff app that can help you manage due dates and pay down debt quickly and efficiently. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.