What is a 401(k) match and how does it work?

A 401(k) is an employer-sponsored plan that lets an employee set aside money for retirement. This money typically goes into mutual funds and other investment options. Plus, a 401(k) offers tax advantages to employees for the money they save.

Many employers also offer what’s known as a 401(k) match. This is when an employer matches some or all of an employee’s 401(k) contributions from their salary. Essentially, a match gives the employee “free” money.

Key takeaways

• To make a 401(k) match, an employer adds money to a 401(k) retirement fund in addition to what an employee contributes.
• An employer might offer a partial or dollar-for-dollar match of the employee’s contributions—or even a non-matching contribution.
• In some cases, employees might not be able to keep all of an employer’s 401(k) match, depending on when they leave that job.
• There are several ways that employees can maximize their employer’s match, like contributing as much as possible and setting up automatic withholding.

A 401(k) match is money that an employer chips in to an employee’s 401(k) retirement account, based on how much the employee contributes. If the employee takes advantage of a match, it can improve their overall retirement plan.

A 401(k) match usually works in one of two ways:

• An employer matches a specific percentage of an employee’s contributions up to a certain percentage of the employee’s salary.
• An employer matches an employee’s contributions up to a specific dollar amount, no matter how much the employee is paid.

Matches can vary by employer, industry and economic conditions. In 2021, investment manager Vanguard calculated the average employer match to be 4.4% of the employee’s pay.

There are several types of 401(k) matches.

Partial matching contributions

A partial matching contribution means your employer matches some, but not all, of your annual contribution to a 401(k).

For example, an employer might match 50% of your contributions up to 6% of your gross salary for one year. So if your gross salary is $60,000 and you earmark 6% for your 401(k), you’d be setting aside $3,600 for retirement. If the employer match is 50%, then you’d receive an extra $1,800—or half of your $3,600 contribution.

Dollar-for-dollar matching contributions

A dollar-for-dollar matching contribution is when an employer matches 100% of the dollar amount of a 401(k) contribution, up to a certain percentage of your pay.

For example, if you contribute $200 per paycheck to your 401(k), your employer deposits an additional $200 into your account each pay period. However, the overall amount of the contribution might be capped at, say, 3% of your salary.

Nonelective contributions

A nonelective contribution—also called a non-matching contribution—means an employer adds money to a 401(k) regardless of whether an employee makes any contributions. For instance, an employer might add 3% of an employee’s annual salary. For a $50,000 salary, that comes out to $1,500. 

For employers, nonelective contributions are a way to strengthen their 401(k) offering.

For 2022, the IRS limits 401(k) contributions to $20,500 from each employee—and $61,000 total contributed by both the employee and employer. Anyone 50 years old and over can make an extra contribution of $6,500.

Every penny you put into a 401(k) always belongs to you. But an employer’s contributions might not, depending on the employer’s vesting schedule. Vesting refers to the ability to retain an employer’s contributions to your 401(k). 

Some employers provide immediate vesting, meaning that if you leave your job in only three months, you’d be able to keep all of the employer’s contributions to your 401(k). But other employers require you to work a certain length of time before you can claim some or all of the employer’s 401(k) contributions. For instance, you might get 30% of an employer’s contributions after putting in three years on the job and 100% after six years.

An employee who doesn’t contribute to their 401(k)—and misses a matching opportunity—could be leaving money on the table. So it pays for employees to maximize an employer’s match.

Begin contributing early

It’s never too early to start saving for retirement. The sooner someone makes 401(k) contributions and takes advantage of an employer’s 401(k) match, the more the invested money can grow. That’s especially true when the employee makes the maximum contribution allowed.

Contribute enough to get an employer’s full match

It’s critical to understand how a 401(k) plan works, including how much an employer’s matching contribution is. With this knowledge, employees can contribute the most money possible to capitalize on the employer’s full match.

To continue maximizing an employer’s match, an employee might consider bumping up their contribution amount after receiving a raise.

Set up automatic 401(k) withholding

To make the most of a 401(k), employees can consider opting for automatic withholding of their contribution for every paycheck. This way, adding money to the account becomes routine. Some employers automatically enroll employees in the 401(k) unless an employee decides to opt out.

Don’t tap into a 401(k) unless absolutely necessary

A 401(k) should be viewed as a long-term way to save for retirement—not as a piggy bank. It might be best to avoid withdrawing money from a 401(k) before retirement so that the investment keeps growing. In addition, the IRS taxes pre-retirement withdrawals from a traditional 401(k).

A 401(k) match is essentially free money. It can help you achieve your retirement goals more quickly, so it’s important to understand how your employer’s 401(k) match works and how to maximize that match.

A 401(k) is only one of several types of retirement funds. You can also learn about a Roth IRA, another common kind of retirement account.