Are 401k employer matching contributions obligatory?


Your company might offer a 401k employer matching program. If so, you consider yourselves lucky and be sure to contribute to your pension plan, since employers are not required by law to make matching contributions to their employees' retirement plans. The ones who do offer 401k employer matching contributions do so as an employee incentive measure.

The majority of employers do, indeed, provide the option of matching their employees' contributions to the employees' 401k plans, although typically the match is not on a dollar-to-dollar basis.

Most employers agree to match a maximum of 50 percent the amount of employees' contributions, but not exceeding 6 percent of their total earnings. The more a worker puts into their 401k, the more likely it is for them to receive a maximum employer contribution.

Here is an example to illustrate this:

If you have an annual income of $30,000, the maximum employer contribution will be $1,800 (6% X $30,000). If you wish to receive this sum, you must make a contribution of $3,600 ($1,800 X 2). This way you are gaining $1,800 from your employer absolutely gratuitously. By the time you retire (say, this is 30 years from the moment you start contributing to a 401k), you will have accrued a total of $162,000 in your 401k ($108,000 from your contributions plus $54,000 from your employer's matching contributions.)

It all sounds very good but there are certain limitations to employer matching programs that you should bear in mind.

  • Once invested in the 401k plan, employee contributions cannot be taken away. However, employers reserve the right to take back the funds they have invested in a worker's retirement plan, if the worker doesn't stay on the job for a certain period of time.
  • New employees have to wait a certain period of time until they become eligible to participate in a company's 401k. However, employers tend to offer more and more shortened enrollment eligibility periods.
  • In addition to the enrollment eligibility period, employees have to wait for a 401k vesting period of five years for cliff plans, and seven years - for graded plans - in order to receive all the contributions made by their employer under the pension plan if they leave the job.
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