How the Employer Match and 401(k) Limit Work

A 401(k) is an employer-sponsored, tax-advantaged retirement plan. You fund this account by contributing a set percentage of your paycheck into the account. One of the biggest perks of a 401(k) plan is that employers have the option to match your contributions to your account up to a certain point. While the IRS places annual contribution limits on 401(k) contributions, employer matches do not count toward that limit. However, there is a higher annual limit for overall contributions, which does include employer matching. A financial advisor can help you work through any questions about how your 401(k) works.

401(k) Contribution Limits

There are two sides to your contribution: what you provide as the employee and the match from your employer (if applicable). You can only contribute a certain amount to your 401(k) each year. This contribution limit includes deferrals that you elect to be withheld from your paycheck and invested in your 401(k) on a pre-tax basis.

Here’s a look at the annual 401(k) contribution limits:

2024: For tax year 2024 (filed by April 2025), the limit is $23,000. Savers who are age 50 or older can make up to $7,500 in catch-up contributions for a total contribution of $30,500.
2025: For tax year 2025 (filed by April 2026), the contribution limit is $23,500. Savers who are 50 or older can make up to $7,500 in catch-up contributions for a total contribution of $31,000.

Employer Match Does Not Count Toward the 401(k) Limit

The good news is that these limits do not include employer matches. If you contribute, say, $23,500 toward your 401(k) in 2025 and your employer adds $5,000, you’re still within the IRS limits. However, there is a limit that applies to total contributions, meaning the sum of the employee portion and employer match.

In 2024, the IRS limits total 401(k) contributions to $69,000 or 100% of the employee’s compensation, whichever is less. That amount rises to $76,500 with catch-up contributions.

In 2025, total 401(k) contributions are capped at $70,000 or 100% of the employee’s compensation, whichever is less. That amount increases to $77,500 with catch-up contributions.

How Employer Match Works

There are a few different ways employers can match an employee’s 401(k) contribution. While the word “match” can imply they contribute the same amount that you do, that’s often not the case. Sometimes they’ll choose to contribute only a certain percentage of how much you contribute to your 401(k). For instance, matching just 50% of your contributions. Even in cases where they match 100% of your contributions, they may only do so up to a maximum amount, whether that’s a dollar amount or a percentage of your contribution or salary.

One percentage plan employers implement is matching 100% of your contribution, but capping it at a certain percentage of your salary. For example, let’s say you make $40,000 a year and your employer offers to match contributions up to 6% of your salary, or $2,400. For your employer to contribute that maximum amount, you would also need to contribute at least $2,400. Remember that if you contribute more than that maximum, your employer will not match the extra.

Another employer may choose to match 50% of contributions, which again is limited to a certain contribution amount. Take the same example of a $40,000 salary and a 6% limit. Contributing that same 6% of your salary would get you $1,200 in employer-matching contributions. In this scenario, pay close attention to the language that your HR department uses in describing this benefit. It may be that the 6% refers to the maximum amount that they’ll contribute – in other words, they’ll contribute 6% of your salary ($2,400) so long as you contribute enough to hit that under the 50% schedule (in this case, $4,800).

Alternatively, it might mean that the 50% matching applies only to employee contributions equaling 6% of their salary. In this case, you wouldn’t be able to get more than $1,200, because they wouldn’t apply that 50% match to any contributions beyond 6% of your salary.

Employer Match with a $40,000 Salary (Example)

Employer Match Plan	Employer Match Maximum	Example Contribution	Employer Match Contribution	Contribution Needed to Meet Employer Match Maximum
50%	6% of Salary ($2,400)	$1,200	$600	$4,800

Employer Match Vesting Schedules

Employer match programs are a way for employers to keep employees happy and cared for. They’re also a way to retain employees. That’s because many matching programs come with a vesting schedule. This means that you don’t have access to the full matching funds until you’ve been with the company for a certain period. The prospect of losing out on that money may keep an employee around longer.

While employees are always fully vested in their contributions, employer contributions often follow a vesting schedule. This schedule determines when employees can claim full ownership of the matched funds. Typically, vesting schedules are either graded or cliff-based. Employees gradually earn ownership over several years, while a cliff schedule grants full ownership after a specific period, such as three years. Understanding these schedules is essential for employees to make informed decisions about their retirement savings and employment tenure.

It makes sense to max out your employer’s matching offer. This is effectively free money and all you have to do to get it is to be a responsible saver. However, talk to a financial advisor to see what’s best for your situation.

With that said, you shouldn’t contribute more than you can afford. Saving for retirement is crucial, yes, but you shouldn’t max out your contributions if it means underpaying your mortgage or not having an emergency fund. That’s especially true if you don’t think you’ll stay with the company long enough to have it fully vested. After all, this would reduce the benefit of matching. Still, if it’s financially feasible for you to max out your matching, do it.

Making the Most of Your Employer Match

If you want to optimize your retirement savings, make sure you fully leverage the employer match in your 401(k) plan. Here are four effective steps to help you make the most of this benefit:

Understand your employer’s matching scheme: Familiarize yourself with how your employer’s matching contribution works. Employers may offer a dollar-for-dollar match or a partial match up to a certain percentage of your salary.
Contribute enough to get full match: Always contribute enough to get the full employer match. This is essential as it represents free money, boosting your retirement savings significantly. For example, if your employer offers a match up to 5% of your income, you should at least contribute that amount to your 401(k) to maximize the benefit.
Increase contributions gradually: If you’re not currently maximizing your employer match, consider increasing your contributions incrementally. Some employers offer programs that automatically increase your contribution rate annually, which can be an effective way to grow your savings without a noticeable impact on your take-home pay.
Keep your financial goals in balance: While maximizing your employer match is important, make sure it aligns with your overall financial strategy. Consider other financial obligations like debt repayment or building an emergency fund. Adjust your 401(k) contributions to maintain a healthy financial balance.

Bottom Line

A small green piggy bank sitting on top of a calculator.

The most important thing to understand is that any employer matching that your company does into your 401(k) account does not impact your individual contribution limit. This means that maximizing these contributions can be a great way to get more money into your retirement account, and you don’t have to save or earn that money. However, the IRS does have separate limits on total contributions, which can increase from year to year. If you have any questions regarding your 401(k) program and employer match, ask your HR representative. That way, you can have a better idea of how to contribute and how much you should have in your 401(k) to retire.

Tips on Saving for Retirement

If you’re looking for hands-on guidance to plan for retirement, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
To maximize your retirement savings, you may want to open other retirement accounts like IRAs. An IRA is an individual retirement account, which means that you’re responsible for opening and funding the account. A Roth IRA is a variety that backloads the tax benefits so you get tax-free growth and retirement income rather than an upfront tax deduction.
Want to make sure you’re on track for a secure retirement? SmartAsset’s retirement calculator can help you determine how much you’ll need for retirement.