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What is Matching Contribution?


A Matching Contribution is a type of financial arrangement which is commonly found in retirement savings plans like 401(k) plans or some employer-sponsored retirement accounts. In the case of a matching contribution arrangement, an employer agrees to contribute a certain amount of money to an employee’s retirement account based upon the employee’s own contributions.


Example: If an employer contributes an additional $1,000 and an employee contributes $2,000 towards their retirement plan, their Employer offers a matching contribution of 50% up to $1,000. This means the employee will contribute $3,000 to the retirement plan.


Matching Contributions are extremely important because they encourage employees to save for retirement, providing them with extra financial support from their Employer.


Does the 401k contribution limit include Employer match?


No, the 401(k) contribution limit does not include the employer match. The contributions are limited to a 401(k) account which applies only to the amount that the employee personally contributes to their retirement account.


  • Employees of large organizations can invest and save pre-tax money for retirement via a traditional 401(k) plan.


  • Some employers match the employee’s contributions until a certain amount.


  • IRS sets an annual contribution limit to a 401(k).


  • Traditional 401(k) plans have a role in the total combined employer-employee contributions.


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contributions will be subject to federal income tax, state income tax, and possibly a 10% early withdrawal penalty if withdrawn prior to age 59 1/2 when the employee withdraws the money from the retirement account in retirement.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

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