401k retirement plans are a common part of employee benefit plans. Helping people prepare for their retirement helps them see a long future ahead with your business. 401k matching is another incentive that you can choose to add on the contributions that come out of your employees’ paychecks every year. Read on to learn the ins and outs of matching.
Who It Benefits
401k matching would benefit every employee who decides to open a 401k retirement plan through the business. Matched contributions from the business, not their paycheck, go into the plan for their future use. For the employees, this is a further return on their investment into the company. For the company, this allows them to retain qualified employees from year to year.
How It Works
Typically, this is done in two different ways. The first way is by instituting a matching scheme that does partial matches of every contribution up to a certain percentage of the salary. This way, the benefit is limited to a certain dollar amount, and the employee must contribute more than the employer to max out the benefit.
Another way to configure the matching is to offer a 100% match on all contributions up to a certain percentage of the salary. This way, the employee must contribute the same amount as the employer’s maximum dollar amount to max out on the benefit. Any contributions exceeding this dollar amount will go unmatched.
For employees with the highest salaries in the company, matching by percentages may not be feasible. In these cases, it is common to match contributions up to a set dollar amount.
Even while making contributions, employers may set up a vesting schedule for employees. This means that all matches made to 401k contributions do not automatically belong to the employee. Employees have to stay on without being terminated by the company for a certain amount of time before all contributions are fully vested in them. During that period, the percentage of employer contributions that they do own grows steadily.
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