Employer matching contributions

Employees participating in a defined contribution plan like a 401(k), 403(b) or 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

Gaining 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 Irregular Isaac, are are both paid the same $100,000 salary in 12 monthly paychecks. Claudia consistently contributes 6% each pay period, but Isaac 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 Isaac 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.

Contributing to the IRS Maximum
If you want to ensure you can contribute to the IRA maximum, while also ensuring you gain the maximum match, be sure to keep the following considerations in mind:
 * If your plan matches by paycheck and does not have a "true up" provision, then making contributions by percentage can be difficult to do if you have a variable salary or you get a raise in the middle of the year. For this reason, it can be safest to contribute a fixed amount each pay period. For example, in 2013 the contribution limit is $17,500, so if you have 24 pay periods, that would be $729.16 per pay period.
 * If your plan matches by paycheck and does not have a "true up" provision, then contributing by percentage can be risky if you set a high percentage and you have a high salary. You may reach the IRS maximum before the year end and therefore miss out on an employer match in later pay periods because you're no longer able to contribute. Or, if you have a variable salary and you underestimate your income, you could wind up contributing less than the maximum allowed because your contribution percentage was too low.
 * If your plan matches by paycheck and does not have a "true up" provision, if you like to front-load your contributions at the beginning of the year, then be sure that you still allow for a constant contribution level all through the year so you still contribute at least enough to get the maximum match all year. For example, suppose you must contribute at least $1,000 per month to get your maximum contribution. In this case, you could front-load with $3,000 contributions in January and February, $2,500 in March and $1,000 per month the rest of the year. This combination would allow you to front-load your contributions while also contributing $17,500 for the maximum IRS contribution while also achieving the maximum match. Be aware, however, that if your salary goes up in the middle of the year, you may have overdone it___________.

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.