401(k) Employer Matching Contributions

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It is very common for 401(k) plans to include provisions for employer matching contributions which are received only by participants who choose to make deferral contributions to the plan. The plan may provide for matching contributions based on all or a portion of the participant’s deferral contributions. The formula used to determine the matching contribution for each participant can be designed in many ways, and the frequency for contributing the matching contributions will be determined by the plan.

The plan may include a cap on the matching contribution. For example, a plan’s matching contribution formula may be 50% of elective deferrals (including regular deferrals and designated Roth contributions), taking into account only deferrals up to 3% of the participant’s compensation. Under this formula, if a participant’s compensation is $100,000 and the participant elects to defer 4% (or $4,000) of his or her compensation to the 401(k) plan, matching contributions will only be calculated based on 3% (or $3,000) of the participant’s compensation. This would result in a matching contribution of $1,500 (50% x $3,000).

It is common for a plan to provide that matching contributions will be deposited to the plan at the same time as the deferral contributions; however, the plan’s provisions will determine when the matching contributions must be deposited. In order for the employer to receive favorable tax treatment for these contributions, they must be deposited by the due date of the corporate tax return, including extension, each year.

The plan’s provisions will also include any requirements for contribution eligibility. For example, if the matching contribution is determined at the end of the plan year (instead of each payroll period), the plan may require the participant to complete a certain number of hours worked during the plan year and/or to be employed on the last day of the plan year in order to receiving the matching contribution. Also, it is important to note that some plans may not provide matching contributions on “catch-up contributions.” For information regarding “catch-up contributions,” click here.

Some of the 401(k) plan safe harbor design options that can be used to comply with the nondiscrimination testing requirements include a minimum level of matching contributions, as well as other requirements. For more information on safe harbor 401(k) plans, click here.