Employer Matching Program

From Wikipedia, the free encyclopedia - View original article

 
Jump to: navigation, search

An employer matching program is an employer’s potential payment to an employee’s 401(k) plan dependent on the extent of an employee’s participation in the plan.[1]

Definition[edit]

An employee’s 401(k) plan is a retirement savings plan. The option of an employer matching program varies from company to company. It is not mandatory for a company to offer a contribution to their 401(k) plans.

Many companies add to an employee's charity contribution. Through a corporate matching gift program, a company can double or even triple an employee's contribution toward a charity. This should not be confused with an employer matching program.[2]

"100% of the first 6%"[edit]

As of 2013 the most common matching program increased to 100% of the first 6% [3] [4] The most common matching program is the “50% of the first 6%.” This agreement states that once the employee reaches contributions that are equal to 6% of their gross pay,[5] the employer’s contributions stop until the following year. If the employee does not put in at least 6% of their gross income toward their 401(k) plan, the worker then gives up any additional compensation from the employer. In this employer's matching agreement 50% of all employee’s contributions is up to 6% of total income. A clearer example of this is a worker who makes $50,000 a year would get $1,500 from their employer simply by putting $3,000 of their own salary into the plan.

Functions[edit]

In a 401(k) plan, the contributions are funded by the employee and are often matched by contributions from the employer. The contributions to an employee’s[6] 401(k) plan are made from the employee's salary before taxes. These funds grow tax-free until they are withdrawn; at that point the contributions can be converted into an Individual Retirement Account. The funds may also be switched if one changes employers. An employer’s matching program is situational and depends on if a workplace offers one. According to the Profit Sharing/401k Council of America, an industry trade group, about 78% of 401(k) plans include some kind of employer match for employee contributions.[5]

In an employer matching program, an employee will typically only receive a contribution from an employer if an employee makes a contribution of their own (e.g., an employer will only match contributions if the employee makes some contribution). Employer matches vary from company to company. The general contribution from an employer is usually 3% to 6% of an employee's pay.[7]

For employees to receive a contribution from their employer, the employee must contribute a specified percentage into a 401(k) plan. The employer will then match that contribution to the retirement plan being offered. The money that is put into the retirement plan is free. Investing in a 401(k) plan is a great way to increase retirement savings and increase the money earned.[citation needed]

In traditional retirement account, the amount one contributes is taken before taxes. On the other hand, a Roth retirement account allows employees to contribute after taxes, with the benefits being withdrawn tax-free in retirement. Usually, employers will specify a vesting period, which is the minimum amount of time an employee must work to claim the employer-matched contributions.[8]

Regardless of how or when an employee stops employment, the money that an employee invests in their 401(k) plan is retained by the employee.[9] The contributions made by an employer may or may not be retained based on the vesting program. To understand this better, a vested employee is one that has worked in a company for a specified amount of time. The employer determines the length of time required to become vested; this is usually a one- to five-year span. A vested employee then becomes eligible to retain all retirement contributions made by an employer. After an employee is fully vested, the employee is eligible to retain the entire amount contributed by their employer, even if they leave the company before retirement. Under federal law an employer can take back all or part of the matching money they put into an employee's account if the worker fails to stay on the job for the vesting period.

Employer matching programs would not exist without 401(k) plans. The Revenue Act of 1978 included a provision that became Internal Revenue Code. Under this act the employees are not taxed on the portion of income they agree to receive as deferred compensation rather than direct cash payment. A 401(k) plan is a long-term money management plan.[10]

Nearly two-thirds of plans provide employer matching contributions today. Most common is a dollar-for-dollar up to a specific agreed percentage of pay which is commonly up to 6% of yearly income.[citation needed] The employer matching program is any potential additional payment to an employee’s 401(k) plan. The employer is not responsible to contribute any specific amount to the employer; each agreement is situational according to the workplace. Since the start of a credit crisis and the 2008 recession, companies are either stopping matching programs or making the match available to employees based on whether or not the company makes money.[citation needed] In this stage of the economy, with many companies rethinking matching programs. If an employee is lucky enough to establish an employer contribution toward their 401(k) plan, this employer match (or free money) is the biggest benefit of a 401(k) plan given that the future of the economy is unpredictable.[citation needed]

Related controversy[edit]

There is much economic controversy with employee 401(k) plans.[11] Without a 401(k), there is no need for an employer matching program. Many political consultants have different views on whether or not investing in a 401(k) plan is beneficial. Some say that the money that is given through an employer matching program is most beneficial because of the uncertainty of any other contributions made by an employee into their 401(k) plan. The only problem with an employer matching program is that it can not exist without the 401(k) plan. With many important cons in the 401(k) plan there is a possibility that employers may not continue to have the option of offering a "match" agreement to an employee.

Cons of 401(k) plan[edit]

These are all concerning issues in a 401(k) plan. Law makers failed to structure laws around financial institutions that support them, so that the 401(k) is a secure retirement.[citation needed]

Pros of 401(k) plan and employer matching program[edit]

The employer matching program and the tax deduction are great advantages to a 401(k) plan; these two alone keep many employees invested.[citation needed] Economically 401(k) plans are good because it forces Americans to invest in anything they want and build their wealth with certain tax breaks. Most Americans invest their 401(k) plan with in American soil stock exchanges or banks; this helps the economy because people are inclined to invest back into the economy.[citation needed]

The contribution limits of the 2013 401(k) stated that the contribution limit is $17,500. If an employee reached the age of 50 by December 31, 2013, they could save an additional $5,500 in their 401(k), for a total savings of $23,000. This is when an employer matching program becomes most beneficial because it allows for free money to be added onto an employee's contribution toward their 401(k) plan.[citation needed]

References[edit]