How 401(k) Matches Work and 2024 Limits

A 401(k) plan, an employer-sponsored retirement savings account, allows employees to set aside a portion of their salary for retirement. Employers often incentivize participation by offering a 401(k) match, where they contribute additional funds to the employee’s account based on the employee’s own contributions. The 401(k) contribution limits for the employer match are $69,000 for 2024, including both employer and employee contributions.

This guide delves into how 401(k) matches operate, the average match percentages, strategies to maximize these benefits, and the updated 401(k) limits for 2024. Additionally, it’s important to know that the employer matches do not count toward the 401(k) elective deferral contribution limit.

Understanding 401(k) Matches

A 401(k) match involves an employer adding money to an employee’s 401(k) account to match the contributions made by the employee. This matching can be full or partial. For a full match, the employer matches dollar-for-dollar, meaning if an employee contributes 3% of their salary, the employer also contributes 3%. For a partial match, such as 50%, the employer contributes 50 cents for every dollar the employee contributes. Some employers use a combination of both.

Employers offer 401(k) matches as an additional form of compensation to attract and retain employees, as well as to encourage retirement savings. In some cases, employers may also make non-matching contributions or profit-sharing contributions to employees’ 401(k) accounts, even if the employees do not contribute themselves.

According to Fidelity, the typical 401(k) match is dollar-for-dollar up to 3% of the employee’s salary, then 50 cents on the dollar for the next 2%. Thus, if an employee contributes 5% of their salary, they receive an additional 4% from their employer. This structure incentivizes employees to contribute at least 5% of their salary to maximize the employer match.

Average 401(k) Matches

The average employer contribution to 401(k) plans varies by age group. Fidelity’s data reveals the following average contributions by age:

• Ages 20-29: 4.1%
• Ages 30-39: 4.7%
• Ages 40-49: 5.0%
• Ages 50-59: 5.2%
• Ages 60-69: 5.2%
• Ages 70+: 4.7%

Overall, the average employer contribution is 4.8%. This figure is slightly higher than the typical 4% match offered by many plans because some companies offer more generous matching schemes. It’s important to note that not all employees contribute enough to receive the full match. As of the end of 2023, 78% of employees in Fidelity-managed plans contributed enough to receive their full company match.

Maximizing Your 401(k) Match

To fully benefit from your employer’s 401(k) match, consider the following strategies:

Contribute Enough to Get the Full Match

Ensure you are saving enough to qualify for the maximum employer match. For example, if your employer matches 3% of your salary, aim to contribute at least 3% to get the full match. This is essentially free money that can significantly boost your retirement savings over time.

Understand Vesting Schedules

Vesting schedules determine how long you need to stay with your employer to retain the matching contributions they make to your 401(k). For instance, you might need to stay with the company for three years to keep the full match. Some plans use a graded vesting schedule, where you earn a percentage of the match each year. Understanding your plan’s vesting schedule is crucial, especially if you are considering changing jobs.

Match Contribution Timing

Be aware of how and when your employer matches contributions. Some employers match contributions each pay period, while others may do so quarterly or annually. Timing your contributions to align with your employer’s matching schedule can prevent missing out on matching funds. For example, if you max out your contributions early in the year and your employer matches per pay period, you might miss out on matches for the rest of the year. Some employers offer a “true-up” feature, which compensates for missed matches if you max out early.

Roth 401(k) Contributions

With the passing of the SECURE Act 2.0, employers can now offer post-tax employer match contributions for Roth 401(k)s. This means that if you are contributing to a Roth 401(k), your employer’s match can also be post-tax, depending on the employer’s plan.

Highly Compensated Employees (HCE)

If you are classified as a highly compensated employee (HCE), your ability to receive a full match might be limited. The IRS defines an HCE as someone who owns more than 5% of a company or earns above a certain threshold. In 2024, this threshold is $155,000. If you are an HCE, check with your employer to understand how it affects your matching contributions.

2024 401(k) Contribution Limits

For 2024, the 401(k) contribution limits have increased, allowing employees to save more for retirement:

Employee Contribution Limit

The maximum employee contribution limit has increased to $23,000, up from $22,500 in 2023. This limit applies to all 401(k) plans under an individual’s name.

Total Contribution Limit

The total annual contribution limit, which includes both employee and employer contributions, has increased to $69,000, up from $66,000 in 2023. For employees aged 50 and older, the catch-up contribution remains at $7,500, making the total contribution limit $76,500.

Compensation Limit

The maximum eligible compensation for contributions is capped at $345,000, up from $330,000 in 2023. This means that even if an employee earns more than $345,000, only the first $345,000 is eligible for employer and employee contributions. This cap ensures retirement savings are equitable across all employees.

401(k) Compliance and Administration

Maintaining compliance with 401(k) regulations can be challenging due to the need for detailed record-keeping and adherence to federal laws. Employers are required to undergo annual 401(k) discrimination testing to ensure plans are equitable and do not favor higher-income employees over those who earn less.

Highly Compensated Employees and Key Employees

The IRS defines a highly compensated employee (HCE) as:

• Someone who owns more than 5% interest in the company regardless of compensation, or
• Someone whose salary is $155,000 or greater in 2024.

A key employee is defined as:

• A company officer who makes more than $220,000 in 2024,
• A 5% owner of the business, or
• A person who owns more than 1% of the business and makes more than $150,000.

Employers must ensure their 401(k) plans comply with these definitions and conduct annual discrimination testing as required by the Employee Retirement Income Security Act (ERISA).

Administrative Support for 401(k) Plans

Managing a 401(k) plan involves significant administrative tasks, from tracking payroll data to following new federal regulations. Employers can benefit from using services like Paycor’s 401(k) plan administration, which automates record-keeping and compliance checks. This helps streamline the process and reduces the administrative burden on employers.

Conclusion

Understanding how 401(k) matches work and staying informed about contribution limits and regulations is essential for maximizing retirement savings. By contributing enough to receive the full employer match, understanding vesting schedules, and being aware of how contributions are matched, employees can make the most of their 401(k) plans. Employers must also ensure compliance with regulations and may find it beneficial to use administrative support services to manage their 401(k) plans effectively.