What it is:
The term matching contribution refers to a matching dollar amount contributed by an employer to the retirement savings account of an employee who makes a similar contribution, usually to a 401(k) plan.These are contributions made by a company in addition to and conditional upon the salary deferral contributions made by the participating employee.
How it works (Example):
For example, these contributions usually take the form of one of the two following scenarios:
One possibility is a dollar-for-dollar contribution up to a certain percentage (i.e. 3%) of employee compensation. The employer matches a dollar for every dollar employee invests up to a certain percentage of the employee's compensation.
The other possibility is a lower amount, such as a $0.50 match on every dollar up to a certain percentage (i.e. 6%) of the employee's salary. The employer invests $0.50 for every dollar invested by the employee up to this maximum percentage.
Why it Matters:
It is important for an employee to know what percentage the employer matches for budgeting/and tax planning purposes. An employee can contribute up to a certain amount based on certain considerations including the company's matching contributions, the employee's other budget needs, and his tax status.