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Does Employer Match Count Toward the 401(k) Limit?

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 towards 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 and all questions about how your 401(k) works.

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

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. For the tax year 2022 (which you’ll file a return for in 2023) that limit stands at $20,500, which is up $1,000 from the 2021 level. 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.

The good news is that this limit does not include employer match contributions. If you contribute, say, $20,500 toward your 401(k) and your employer adds an additional $5,000, you’re still within the IRS limits.

However, there is another limit that applies to overall contributions; your employer match contributions are taken into account for this overall contribution limit. For the tax year 2022, that limit stands at $61,000 or $67,500 when you include catch-up contributions for workers 50 or older. This means that together, you and your employer can contribute up to $61,000 for your 401(k). Note, though, that most employers are not this generous with their contributions, so you’re likely in little danger of exceeding this limit.

Employer Match Explained

There are a few different ways employers can match an employee’s 401(k) contribution. While the word “match” can imply they contribute the exact 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 max amount, you would also need to contribute at least $2,400. Keep in mind 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 and You

Does Employer Match Count Toward the 401(k) Limit?

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 of time. The prospect of losing out on that money may keep an employee around longer.

In almost all cases, 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.

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

401(k) Contribution Limits

In 2022, your limit for annual 401(k) contributions through an elective salary deferral is $20,500 – an increase of $1,000 from the 2021 level. However, any employer matching does not count toward that limit. Your to all 401(k) accounts held by a single employee in 2022 is $61,000 or 100% of your compensation, whichever is less. The employer matching funds do count toward the overall contribution limit of $61,000, but few employers are generous enough with their matching to reach that anyway.

The more pertinent limit to employer matching is the one of your employer themselves. This is usually a percentage of your pay. If at all possible, you should max that out. Your net pay will go down a little, but the magic of pre-tax contributions means that it won’t go down by as much as you contributed. And you’ll be glad you contributed come retirement.

Keep in mind that if you’ve reached the age of 50 or more, you can make additional catch-up contributions. This encourages you to bulk up your savings as you get closer to retirement. For 2022, the annual catch-up limit is an additional $6,500.

Bottom Line

employer match

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. 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 could help you create a financial plan for your needs and goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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.

Photo credits: ©iStock.com/jacoblund, ©iStock.com/DNY59, ©iStock.com/BrianAJackson

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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