How Does 401(k) Matching Work? (2024)

You may have heard that there’s no such thing as a free lunch, but to the millions of Americans whose employers offer them a 401(k) match, this perk comes close.

Unless you are one of the shrinking number of Americans who can count on a pension, chances are a 401(k)—which lets you sock away pretax money to spend once you leave the workforce—is at the center of your retirement plan. In 2022, these accounts held more than $6 trillion and had about 60 million active participants, according to the Investment Company Institute.

But tax advantages aren’t the only benefit 401(k)s offer. In addition to the money you invest, many employers match a portion of your contributions. So, for instance, an employer offering a full 3% match would contribute one dollar to your 401(k) for every dollar that you put in yourself, up to 3% of your salary.

To many financial experts, those extra contributions are found money.

“Employer matching in a 401(k) plan is like having someone else fill up your gas tank for free,” says Andrew Latham, a certified financial planner based in Rolesville, N.C., and content director at the financial website SuperMoney.

However, there are often conditions you have to meet to be eligible for a 401(k) match, such as serving at least a year at the company.

Here’s how 401(k) matching works and how it can help you save more for retirement.

What is a 401(k)?

A 401(k) is a type of Internal Revenue Service-sanctioned retirement plan that is funded by deducting part of your paycheck before it is taxed. The money is swept into an account where you can invest in funds selected from a menu offered by your employer.

(If you work for a nonprofit or a public educational institution, you may have access to a 403(b) rather than a 401(k). These accounts offer similar tax benefits and employers can also offer a matching contribution.)

In general, you’re eligible to participate in your employer’s 401(k) plan if you’re at least 21 years old and you have worked at the company a year or more, although some employers might allow you to contribute sooner.

401(k)s are named for the section of the tax code that regulates them and the biggest benefits of a 401(k) are the tax breaks. Contributing to a 401(k) through payroll deductions can reduce your annual tax bill, and your investment returns are sheltered from taxes until retirement.

When you use a 401(k) you defer income taxes, paying them when you withdraw money in retirement instead of when you contribute. Plus, you get to skip capital-gains taxes altogether.(Some companies also offer Roth 401(k)s, which are funded with after-tax money and allow tax-free withdrawals in retirement.)

By contrast, a regular investment account, known as a brokerage account, is funded with money you already paid income taxes on. Plus you may have to pay capital-gains taxes each time you sell an investment for a profit. An individual retirement account also provides tax advantages, but you don’t need to work for any specific company to open and fund one. While IRAs offer a much wider selection of investment options than a 401(k) or 403(b), you can’t save as much yearly and the upfront tax deduction is limited by your income.

How does 401(k) matching work?

Employers that offer 401(k)s have the option of contributing to employees’ individual accounts but must follow strict rules about the method and timing of the contributions.

If your employer offers a 401(k) match, it will put money into your account based on the size of your contributions, giving you more cash to invest for retirement. Just as with your own contributions, you won’t have to pay taxes on the money until you take it out of your account.

There are two numbers to pay attention to with any 401(k) match: what percentage of your contribution is matched by the employer and the employer’s maximum contribution. The maximum contribution can either be a flat dollar amount or a percentage of your annual salary. This is important because it helps you calculate how much you need to save to get the most out of a 401(k) match.

How partial 401(k) matching works

Most employers opt for a partial 401(k) match over a full match, says Mindy Yu, director of investments for Betterment at Work, an arm of the robo advisor that manages 401(k)s for small-to-midsize businesses. This means you get a portion of your contributions matched—say, 25% or 50%—up to a maximum percentage of your salary.

In one common setup, the employer matches half of an employee’s contributions, up to 6% of their salary. So if you contribute $5,000 to your 401(k) through payroll deductions, your employer would add $2,500, as long as that is no more than 6% of your annual salary.

Another, more complex version of a partial match is where an employer fully matches contributions up to a specific percentage of an employee’s salary, then drops to a 50% match on the next tranche of their salary.

For example, if a company sets its maximum match at 5% of pay, then an employee earning $100,000 could get a full match on the first $3,000 in contributions and a 50% match on the next $2,000 for a total employer match of $4,000.

How full 401(k) matching works

A full 401(k) match is where an employer adds $1 to your 401(k) for every $1 that you contribute, up to a limit. It’s also referred to as dollar-for-dollar matching or 100% matching.

Put another way, your employer doubles your savings up to whatever limit it sets. The limit can be a percentage of your annual pay or a flat dollar amount. A full match is less common than a partial match, but “really beneficial,” Yu says.

401(k) matching for student loan payments

In 2023, some employers began offering 401(k) matching for student loan payments. These work similarly to other 401(k) matching programs, but instead of matching the contributions you put directly into your 401(k) account, your employer matches what you make in monthly student loan payments—up to its established matching limits.

This is a good way for younger student loan borrowers—who may be unable to contribute to their retirement account because of their loan payments—to start growing their nest egg.

What is vesting?

A 401(k) match may equate to free money, but you probably need to wait to really consider it your own. Employer 401(k) contributions are subject to vesting schedules where you gain ownership of the contributions over time.

The downside is that if you leave your job before your 401(k) match is fully vested, your employer may claw back some or all of what they have kicked in.

Some employers offer immediate vesting—they may be required to by law if the 401(k) plan allows larger contributions for highly compensated or key employees—but many use “cliff” or “graded” vesting schedules to encourage employee retention. (Note: You always have full ownership over your own 401(k) contributions.)

Cliff vesting is where you have no ownership of employer contributions until you’ve worked at the company for a period, typically between one and six years. When you reach that tenure, you become fully vested.

Graded vesting is where the employer makes a percentage of its contributions available to you each year you work at the company until you reach 100%. For example, 0% in the first year of service, 20% in the second year of service, 40% in the third year of service and so on.

If you leave before your 401(k) is fully vested, you’ll have to forfeit some of the employer’s contributions. “You’ve gotta consider that money a gift if you do stay,” says Jay Zigmont, a certified financial planner based in Water Valley, Miss. “It isn’t your money until you get to that point.”

If your company offers a Roth 401(k), you may also be able to get a match. However, since your contributions are posttax, employer matches are generally kept in a separate, pretax 401(k) account.

Does employer matching count toward my 401(k) contribution limit?

The IRS limits how much can be added annually to a single 401(k) account by an employee and their employer. In 2024, the combined total is $69,000 when an employee is under 50 and $76,500 when an employee is 50 or older.

Within that overall limit is a separate limit for employee 401(k) contributions: in 2024, you can defer up to $23,000 of your salary to your 401(k) if you’re under 50 or $30,500 if you’re 50 or older.

The difference between the overall 401(k) contribution limit and your personal contribution limit is how much your employer can add to your account through matching or nonmatching contributions.

What is a good 401(k) match?

401(k) matches vary by industry, company size, and ultimately the individual employer. “It really depends on what the employer is capable of matching,” Yu says. She adds that “there is no magic number” because you also have to consider vesting schedules and other conditions to reasonably compare employer matches.

Most employers outsource their 401(k) operations, often to large investment firms. Vanguard, one of the largest 401(k) managers, said it implemented more than 170 unique matching formulas for thousands of companies in 2021.

The most common setup among Vanguard’s defined-contribution plans, which includes 401(k)s, was a 50% match on employee contributions, up to 6% of compensation. The value of that is equivalent to adding 3% to an employee’s pay.

Another top 401(k) manager, Fidelity, said the most popular matching formula among its plans in 2022 was based on a maximum employee deferral of 5% of pay—for the first 3%, the company would fully match contributions and for the next 2% it would match half.

Why it pays to invest at least enough to get the full match

It is no exaggeration to say that you’re leaving money on the table if you don’t add enough to your 401(k) to at least get the maximum match (here’s a calculator to check if you’re contributing enough to make the most of your match).

Think of it as additional compensation. If you’re earning a salary of $100,000 and an employer offers to match your contributions up to 3% of your pay, you’re really bringing in $103,000—and you don’t have to pay taxes on all of that income. While an employer match isn’t going to make or break your retirement savings, says Zigmont, it can offer a nice boost.

With fewer Americans feeling confident their retirement savings will last, every little bit helps.

What can I do if my employer doesn’t offer a matching contribution?

Experts say if you have access to a 401(k) you should still contribute even if there is no match on the table. The tax benefits combined with years of compounding returns are too good to pass up.

That said, a 401(k) shouldn’t be the only tool in your retirement preparation kit. Both traditional and Roth IRAs, which you can fund as long as you have earned income, are worth consideration. Which one is better for you depends on your income and tax situation, but they are generally a good choice if you want more flexibility around withdrawals and your investment selection.

—Additional reporting by Aly J. Yale