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

Aa 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 though 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 2019, that limits stands at $19,000. In 2020, the limit is expected to rise to $19,500. 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, $18,000 toward your 401(k) and your employer adds an additional $5,000, you’re still within the IRS limits.

However, there is another limit which applies to overall contributions; your employer match contributions are taken into account for this overall contribution limit. For 2019, that limit stands at $56,000. This means that together, you and your employer can contribute up to $56,000 for your 401(k). If you contribute the max of $19,000, your employer can contribute up to $37,000 for 2019. For 2020, you and your employer can contribute up to $57,000. 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 – again, limiting it to a certain contribution amount. Again, assume 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 up 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
100% 6% of Salary ($2,400) $1,200 $1,200 $2,400
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 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 over paying 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 be fully vested, which would reduce the benefit of matching.

Still, if it’s financially feasible for you to max out your matching, do it.

The Takeaway

employer match

In 2020 you’re limited to $19,500 in annual 401(k) contributions, but any employer matching does not count toward that limit. The employer matching funds do count toward the overall contribution limit of $57,000, but few employers are generous enough with their matching to hit that limit.

The more pertinent limit to employer matching is the one imposed by the employer itself – usually given as 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.

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

  • 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. You can start by using our retirement readiness calculator, but for more hands-on guidance we recommend working with a financial advisor. You can find an advisor in your area today using SmartAsset’s financial advisor matching tool.

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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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