What is an employer match on a 401(k)?

Many employers offer 401(k)s as an employee benefit. Some offer a 401(k) employer matching plan, where the employer matches the amount an employee contributes toward their 401(k).

The amount an employer matches can vary, depending on the company and IRS limits. Some employers set a maximum percentage for matching. For example, a company may match up to 3% of the employee’s salary. Other organizations match the full amount.

Offering an employer matching plan can show appreciation to employees.

Does the 401(k) limit include a company match?

The IRS establishes a yearly maximum 401(k) contribution amount for employees. An employer match into a 401(k) doesn’t usually factor into this limit. However, the IRS also establishes an overall contribution limit. The total employee and employer contributions must stay below this limit to comply with IRS rules.

Does employer match count toward the 401(k) limit if the contribution is in stock?

In some cases, employers make matching 401(k) contributions in the form of company stock. When they do, the employer match still doesn’t count toward the employee contribution limit in most cases. The IRS typically treats the stock match like a cash contribution. However, the stock match may count toward the overall 401(k) contribution limit.

How does a 401(k) match count toward the limit if a person has two jobs?

In most cases, the IRS contribution limits apply to all the retirement accounts an employee has at a company and any related companies. If an employee has two jobs at unrelated employers and receives a 401(k) plan for each, they can typically make a full contribution to each account. In addition, both employers can match their contributions up to the overall limit.

An overview of 401(k) contribution limits

The employee and employer match limits for 401(k)s fluctuate annually to account for inflation. Since inflation has risen, the 401(k) max contribution has increased in recent years.

Employee 401(k) contribution limits

According to the IRS, the employee contribution amount 401(k) limits per year are:

• 2019: $19,000
• 2020: $19,500
• 2021: $19,500
• 2022: $20,500
• 2023: $22,500
• 2024: $23,000

Overall 401(k) contribution limits

The combined limit per year that employees and employers can contribute is:

• 2019: $56,000
• 2020: $57,000
• 2021: $58,000
• 2022: $61,000
• 2023: $66,000
• 2024: $69,000

Based on the contributions limits for 2024, an employee can generally contribute up to $23,000 toward their 401(k). The employer can match the employee contribution, as long as it doesn’t exceed the separate $69,000 overall limit.

Since matching $23,000 in full would only total $46,000, most employees don’t have to worry about this dilemma. However, other factors contribute to the overall contribution limit:

• Elective deferrals, other than catch-up contributions
• Employer matching contributions
• Employer nonelective contributions
• Allocations of forfeitures

A knowledgeable tax expert, such as a certified public accountant (CPA), can help you calculate the total contributions to employee 401(k) accounts.

401(k) catch-up contribution limits

If you have employees aged 50 or older, they may be eligible for additional contributions to their 401(k) accounts. The IRS calls these catch-up contributions.

The 401(k) limits for these catch-up contributions per year are:

• 2019: $6,000
• 2020: $6,500
• 2021: $6,500
• 2022: $6,500
• 2023: $7,500
• 2024: $7,500

Caps on compensation for 401(k) contributions

The IRS limits how much of an employee’s salary you can base contributions on each year. These annual limits for 2024 and previous years are:

• 2019: $280,000
• 2020: $285,000
• 2021: $290,000
• 2022: $305,000
• 2023: $330,000
• 2024: $345,000

Based on these limits, $345,000 is the maximum annual salary you can use to calculate an employer match in 2024.

For example, imagine your match is 3% and an employee makes $500,000. You would contribute 3% of $345,000, not $500,000.

The person in this example would also use $345,000 as their salary when calculating their 401(k) contributions.

Exceptions to 401(k) compensation caps

Under IRS rules, key employees have a separate compensation cap for 401(k) contributions. This regulation helps ensure company owners and highly compensated individuals don’t overly benefit from 401(k) employee-matched retirement plans. The first category of employees that nondiscrimination testing applies to iskey employees.

Key employees are defined as any employee who:

• Owns 5% or more of the company
• Owns more than 1% of the company and makes more than $150,000
• Is an officer and compensated above the threshold for the tax year

The 401(k) limits for matching based on key employees’ compensation threshold for nondiscrimination testing per year are:

• 2020: $185,000
• 2021: $185,000
• 2022: $200,000
• 2023: $215,000
• 2024: $220,000

The other type of nondiscrimination testing applies to highly compensated employees (HCE). An HCE is someone who:

• Owns a 5% or more interest in the company in the current or prior year
• Earned compensation that exceeds the cap for the tax year

The 401(k) limits for matching based on the highly compensated employees’ compensation threshold for nondiscrimination testing per year are:

• 2019: $125,000
• 2020: $130,000
• 2021: $130,000
• 2022: $135,000
• 2023: $150,000
• 2024: $155,000

What if I still have questions about matching 401(k) plans?

If you’re still uncertain about the rules for matching 401(k) plans, seek the advice of a knowledgeable professional. Contact your 401(k) plan provider, a tax accountant or a tax attorney, or contact the IRS directly for answers to your questions.

FAQs about 401(k) employer match and contributions

What is a 401(k)?

A 401(k) is a retirement savings plan some employers offer their team as a financial benefit for working at the company. The US government established the 401(k) to incentivize workers to save for retirement. Employees volunteer to have a certain amount deducted from their paychecks each pay period to go toward their 401(k) savings accounts.

Can employees enroll in a 401(k) employer match plan as soon as they’re hired?

Employers may define their specifications regarding when employees are eligible for 401(k) enrollment. Some companies allow registration immediately, while others require a certain amount of time to pass. For example, a company may restrict enrollment for the first six months of employment. Employers should make these regulations clear during the hiring process so employees aren’t surprised if they need to wait.

Why do 401(k) limits change in some years and remain unchanged in others?

The 401(k) contribution limits are adjusted annually in accordance with changes in inflation. The effects of inflation are measured by the consumer price index (CPI) for urban wage earners and clerical workers. If inflation increases significantly, 401(k) matching limits are increased by $500 or $1,000 increments. However, if the increase in inflation isn’t significant, the limits typically remain unchanged.