Employer matching contributions

Employees participating in a defined contribution plan like a 401(k), 403(b) or Thrift Savings Plan (TSP)) may be eligible for an employer match on their contributions. Companies use a variety of matching rules and formulas, so it is imperative that each employee verifies the exact rules of their plan with their employer. While the rules of plans vary, this page attempts to outline some common themes and best practices

Strategies to achieve the maximum match
Plan participants are regularly encouraged to contribute to the plan at least up to the point where they can gain the maximum match to which they are entitled.

In most cases, gaining the match can be as straightforward as contributing a certain percentage all year. For example, if the employer matches 50% of an employee's contributions up to 6% of the employee's salary, then an employee who regularly contributes 6% of her $100,000 salary all year will gain a $3,000 match on her $6,000 of contributions.

In this example, a couple of scenarios could cause the employee to miss out on the maximum match:

Skipping contributions
Suppose the employee with the $100,000 salary does not contribute for the first six months of the year, but in the last six months contributes $1,000 per month for a total of $6,000--the same total contribution amount as an employee who contributes 6% each paycheck all year. If the employer matches up to 3% of an employee's salary each pay period if the employee contributes 6% or more, then the additional contributions in the second half of the year are "wasted" in the sense that the employer will match only up to 6% of salary and no more.

For example, suppose two employees, Consistent Claudia and Procrastinator Pete, are are both paid the same $100,000 salary in 12 monthly paychecks. Claudia consistently contributes 6% each pay period, but Pete skips the first six months and doubles his contributions in the second half of the year:

While both employees contributed the same amount over the year, under the rules of this plan, Claudia will gain the maximum match while Pete will get only half.

Some plans may have a "true up" provision in the plan that will help ensure that an employee who contributes irregularly will still get an employer match based on the employee's total annual contribution, rather than based on a formula for each pay period in isolation.

Maximizing employer match
If your employer provides a matching contribution, you will want to maximize that amount. Take into account the following considerations:


 * Some employers match employee contributions only as they are made from payroll, and do not offer "make up" or "true up" contributions; one such employer is the Federal Thrift Savings Plan. This can cause an employee to lose out on some matching funds if:
 * The employee contributes the IRS maximum before the end of the year.
 * The employee suspends contributions for any period of time.
 * If the employer does offer true up contributions, then any shortfall in matching funds because of the scenarios above, will be added to the employee's matching funds at the end of the year to "true up" the employer's match. If your employer does offer to true up contributions, then many of the details in this section do not concern you as your employer will make sure you gain the maximum match.

Considerations for those who want to maximize their contribution to the IRS maximum, and earn the maximum match available:
 * Ideally, if you plan to contribute the IRS maximum, you should contribute a fixed amount per pay period as opposed to a percentage. For example, supposing you are paid two times per month and the IRS maximum is $18,000, then you should elect to contribute $750.00 per pay period ($18,000 / 24).
 * Many plans do not allow participants to specify a fixed contribution per pay period, but only offer a percentage contribution based on salary. In this case, calculate what percentage it would take to maximize over the course of the year. For example, if you earn $100,000 per year, and are paid twice per month, and the IRS maximum is $18,000, then, you would choose 18.0%.
 * If you have a variable salary, or if you get a raise or salary reduction, then you'll need to regularly recompute your contribution amounts to make sure you wind up contributing the maximum amount while also earning the highest matching amount you can.

Two or more jobs in one year
If a person expects to have the opportunity to contribute to two or more plans in the same year, then the employee should consider the rules for each plan (to the degree that's possible) to maximize the opportunity to both contribute as much as possible, and to gain the maximum possible employer match.