401k Match Per Pay Period vs. Annual | How Does the Process Work?

A 401(k) plan is essential to prepare for the future. The more you contribute, the better.

You may have heard about “matching contributions” before. It happens when employers “match” your contributions. Some people consider this “free money,” but how does that work?

I’ll guide you through the process of employer-matching contributions and its different types. Also, we’ll take a look at the two main types of employer-match contributions you can expect.

What’s a 401(k) Employer Match?

401 (k) matching is an employee benefit. There, the employer makes a “matching” contribution to the employee’s contributions. An employer contribution has limits. Still, matching is an excellent way for employees to save money.

How does an employer match work? As an employee, you can contribute part of your salary to your 401(k). You can either choose a percentage or a fixed dollar amount.

The employer, on the other hand, can match your contribution up to a certain limit. This means you can save money faster and prepare for your retirement.

Typically, employees contribute about 8.8% of their yearly salary to their 401(k). Adding the 401 (k) match offered by employers can certainly get that number higher up.

What’s the Limit for Matching Employer Contributions?

According to Fidelity, the matching annual contribution limits to a 401(k) in 2023 are set to $66,000. Single employee contribution limits stay at $22,500 of their annual salary. You could contribute an extra $7,500 if you’re over 50.

The limit for matching contributions gets updated every year.

When Do Companies Match a 401(k)?

It depends. If your employer is willing to make matching contributions, there are two main outcomes.

You can get the contribution on your payday. The second option is a lump-sum contribution once the year ends.

What’s the Difference Between “Per Pay Period” and “Annual Period” Matches?

Employers match contributions

Employers match contributions depending on the terms of your 401(k).

First, we have the “Per Pay Period” or “Payroll Matching” method. It’s the most common option. The employer matches your contributions on the day you get your paycheck.

If you make contributions outside your payroll period, you’re not likely to get the 401 (k) match.

There’s also the “Annual Period” or “Lump-sum Matching” method. The employer makes a single lump-sum contribution yearly. This is more common if you make several contributions to your 401(k) over the year. You don’t have to meet a specific number of contributions per year to get the match.

Which option is better, though? It’s hard to say since it all depends on the case. Typically, payroll matching is the most appropriate choice for both employers and employees. Employers get to save a bit of money and employees would get more money in their retirement account faster.

What Are the Most Common Methods Followed for Employee Contributions?

Each employer may use a different formula to calculate how much they’ll contribute to your 401(k) plan. You can ask them which method they use to have a better idea of what to expect.

Full Matching (or “Dollar-for-dollar” Match)

This is the “simplest” formula. In dollar-for-dollar matching, the employer matches the same amount of money you contribute to your 401(k) (as long as it’s within the allowed limits).

Partial Matching

On the contrary, a partial match formula explains that the employer will contribute part of the money you put into your 401(k). Typically, employers pay about 50% of your contribution and up to 6% of your salary.

What Are the Vesting Schedules for a 401(k)?

“Vesting” tells how much of your employer’s contributions belong to you. In other words, it tells you how much money is actually yours at the time you decide to leave your current employer.

You may forfeit some employer contributions if you leave the company too soon or are terminated within a particular period.

Most of the time, you can expect a vesting period of five years to ensure all the contributions are yours. The more years you work for the company, the higher the percentage you get to keep from your employer’s matching contributions. This is known as “Gradual Vesting.”

The “Cliff Vesting” method is a bit more confusing since the employer sets a specific vesting time. You can be 0% vested in your first year and suddenly get to 100% in your fourth year, for example.

For more information, check out the best options for company 401k match and see which companies offer the best matches.

Bottom Line

When does an employer match a 401(k)? It ultimately depends on their terms/conditions. Employer matching contributions aren’t too complicated to understand. They could be an excellent way to prepare for retirement, as long as you meet your employer’s terms.

If you have any doubts about how your employer manages 401(k) matching (if they do), the best thing you can do is ask them.