What is a Matching Contribution?
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 do Matching Contributions Work?
Matching contributions can be made to 401(k) plans including the SIMPLE, SIMPLE IRA'S, and the 403(b) plans. These contributions are generally based on a percentage of the participant's compensation.
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 Matching Contributions Matter
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 or her tax status.