What is Matching Contribution?
A matching contribution is a kind of contribution made to a retirement or savings plan by an employer or organization, usually as part of an employee benefits package. Up to a specific percentage or sum of money, the Employer agrees to match a part of the employee’s contribution to the plan.
Example: Employer would contribute an additional $1,000 (50% of the employee’s contribution up to a maximum of $1,000) if an employee contributed $2,000 to their retirement plan and their Employer offered a matching contribution of 50% up to $1,000. This implies that the employee would contribute $3,000 in total to the retirement plan.
Does 401k contribution limit include Employer match?
Your contribution has two components: what you give as the employee and, if applicable, the employer match.
The good news is that employer match contributions are not counted towards this cap. You are still within the IRS limits if you contribute, let’s say, $20,500 to your 401(k) plan, and your Employer matches that amount with an additional $5,000.
- Employees of large corporations can invest and save pre-tax money for retirement through traditional 401(k) plans.
- Up to a certain amount, some employers match employee contributions.
- The annual contribution limit to a 401(k) is set by the IRS.
- Traditional 401(k) plans have caps on the total combined employer-employee contributions.
- Through 403(b) plan, 457, and Thrift Savings Plans, non-corporate employees can also save for retirement.
Are Employer Matching Contributions Taxable?
Employees are not taxed in the year that their Employer makes matching contributions to a qualified retirement plan, such as a 401(k) or 403(b).
In addition to not being included in the employee’s taxable income for the year, Employer matching contributions are also not subject to federal, state, or FICA taxes. (Social Security tax and Medicare taxes).
However, the amount of employer matching contributions will be subject to federal income tax, state income tax, and possibly a 10% early withdrawal penalty if withdrawn prior to age 59 1/2 when the employee withdraws the money from the retirement account in retirement.
Also, See: Withholding Allowances