Are You Making the Most Out of Your 401(k) Employer Match?

The 401(k) is one of the most common ways for individuals to save for their future. They offer many benefits, such as the opportunity to save and invest pre-tax earnings. Additionally, while not required, many employers contribute to employee 401(k)s as an additional employee incentive.

Many employers match a percentage of employee salary based on what the employee is contributing throughout the year, while others match up to a certain dollar amount for all employees at the end of the year. All plans work differently, so it’s important to know how your plan works to make sure you’re maximizing your possible benefits.

Is There a Limit on How Much an Employer Can Match for 401(k) Contributions?

Each year, the IRS sets limits on how much can be contributed to a 401(k). In 2023, the maximum combined (employer and employee) contribution is $66,000 for those under 50 years old and $73,500 for those over 50. The individual employee maximum contribution is $22,500 for those under 50 and $30,000 for those over 50.

The amount an employer can match in a 401(k) depends on how much the employee is contributing. For example, assume an employee under 50 years old contributes the maximum of $22,500. The difference between the total contribution limit of $66,000 and the employee contribution of $22,500, $43,500, is the maximum an employer can match.

Usually, the employer match isn’t great enough to put an employee over the combined contribution limit of $66,000 (or $73,500). For self-employed individuals, check out our blog post on small business retirement plan options.

Is There a Salary Cap for 401(k) Employer Match?

The IRS sets a limit on the amount of compensation that can be matched on. In 2023, the amount is $330,000. High income earners unaware of this may be missing out on their full employer match.

Let’s say you earn a salary of $300,000 and a bonus of $105,000 paid in January. You’re 45 years old, elect to defer 7.5% of your salary, 0% of your bonus, and your employer matches 5% on a “payroll basis”. A “payroll basis” means that your employer only matches on the income the employee contributes, which in this example excludes matching on your bonus.

At the end of September 2023 your compensation is $330,000, and your employer will no longer be able to match because of the IRS compensation limit. Looking at the breakdown below, you’re missing out on $3,750 of employer match.

MonthEmployee ContributionEmployer MatchTotal Compensation
January $                                    1,875 $                       1,250 $                          130,000
February $                                    1,875 $                       1,250 $                          155,000
March $                                    1,875 $                       1,250 $                          180,000
April $                                    1,875 $                       1,250 $                          205,000
May $                                    1,875 $                       1,250 $                          230,000
June $                                    1,875 $                       1,250 $                          255,000
July $                                    1,875 $                       1,250 $                          280,000
August $                                    1,875 $                       1,250 $                          305,000
September $                                    1,875 $                       1,250 $                          330,000
October $                                    1,875 $                              –   $                          355,000
November $                                    1,875 $                              –   $                          380,000
December $                                    1,875 $                              –   $                          405,000

It’s important to review your Plan Document to know how your employer makes matching contributions. For high income earners who reach the $330,000 compensation amount more quickly and/or have a high employer match, the money missed out on can be even greater.  

Does This Affect Employees Making Less Than $330,000?

Yes, employee 401(k) contribution limits can impact your employer match.  No matter the income level, employees maximizing their contributions early in the year may miss out on employer match if their company does not offer a “true up”. A “true up” is when a company still makes matching contributions after the maximum employee contribution has been reached.

For example, if you are 32 years old, earn a salary of $100,000, defer 30% to your 401(k), and your employer matches 6% of your contribution, you will hit the maximum employee contribution at the end of September. Therefore, since you are not contributing during the last 3 months of the year your employer match could stop as well. As seen in the table below, you may miss out on $1,500 of employer match.

MonthEmployee ContributionEmployer MatchTotal Employee Contribution
January $                                   2,500 $                         500 $                                          2,500
February $                                   2,500 $                         500 $                                          5,000
March $                                   2,500 $                         500 $                                          7,500
April $                                   2,500 $                         500 $                                        10,000
May $                                   2,500 $                         500 $                                        12,500
June $                                   2,500 $                         500 $                                        15,000
July $                                   2,500 $                         500 $                                        17,500
August $                                   2,500 $                         500 $                                        20,000
September $                                   2,500 $                         500 $                                        22,500
October $                                          –   $                            –   $                                        22,500
November $                                          –   $                            –   $                                        22,500
December $                                          –   $                            –   $                                        22,500

Properly maximizing your employer match can lead to more money in your pocket for retirement. Failing to account for the compensation limit for employer matching and maximizing your 401(k) contributions too early in the year can be costly. If you have questions about how your plan works, it can be helpful to reach out to your HR department or a Wealth Advisor at Marshall Financial.


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