Calculating Employer Matching Contributions to 401(k) Accounts

Companies that offer matching contributions do so for numerous reasons, including recruitment and retention of the most qualified individuals. Also, companies choose the formulas for making contributions and minimum and maximum contribution limits as illustrated in this lesson. Here are three common approaches for determining matching contributions.Full MatchThe employer fully matches an employee’s contribution to the 401(k) account up to an amount set by law.ExampleFor illustrative purposes, an employee earning $50,000 annually contributes $2,000 to her 401(k). Then, the company’s matching contribution equals $2,000.Fixed Dollar MatchThe employer deposits $1 for every $1 the employee contributes up to a specified limit—for instance, 5% of pay.ExampleOne employee contributes 3% of her $100,000 pay, equaling $3,000: (3% × $100,000). The employer contributes the same amount.Another employee contributes 10% of his $100,000 pay, equaling $10,000: (10% × $100,000). In this case, the company deposits $5,000: (5% × $100,000) because the plan specifies a 5% matching contribution maximum.Variable Dollar MatchThe employer’s contribution decreases as an employee’s contribution increases.ExampleFor example, an employer might deposit $1 for every $1 on the first 3% of pay contributed by the employee, and 50 cents per dollar on the next 3% of pay. An employee who earns $100,000 annually contributes 6% to the 401(k) plan, equaling $6,000: (6% × $100,000). The employer contributes a total of $4,500: {[$1 × (3% × $100,000)] + [$0.50 × (3% × $100,000)]}.Your Task for This AssignmentUsing the examples above as a guide, calculate the employer’s matching contributions for three employees, Barbara, Wei, and Miguel, using each method. Barbara earns $35,000 annually and does not contribute anything to the 401(k) plan. Wei earns $125,000 annually and contributes 7% of that pay to the 401(k) plan. Miguel earns $80,000 annually and contributes 2% of that pay.