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 elective deferral contributions to the plan. The plan may provide for matching contributions based on all or a portion of the participant’s elective deferral contributions. The formula used to determine the amount of matching contribution for each eligible participant can be designed in many ways, and the rules for determining when and how the matching contributions will be made are 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). For information regarding Roth contributions click here.

Although it is common for a plan to provide that matching contributions will be deposited to the plan’s trust at the same time as the elective deferral contributions; the plan’s provisions may provide some other deadline by which the matching contributions must be deposited. In order for the employer to receive favorable tax treatment for these contributions, however, they must be deposited by no later than the due date of the employer’s tax return, including extension.

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

Some of the 401(k) plan safe harbor plan design options that can be used to help a 401(k) plan 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.

“Roth” Matching Contributions

Effective for contributions made after December 29, 2022, the SECURE 2.0 Act provides that 401(k) plans may choose to permit participants to elect to receive any employer matching contributions (along with any employer nonelective contributions) on a “Roth” or after tax, basis. Prior to SECURE 2.0, employer matching and nonelective contributions to 401(k) plans could only be made on a pre-tax basis.

In order for 401(k) plans to incorporate this optional feature, they must already offer, or must establish, separate “Roth” accounts for participants, and the plan document will have to be amended to specifically provide for the feature.

All employer contributions treated as “Roth” contributions must be immediately 100 percent vested when made (see “Vesting Schedule”). Employer contributions treated as “Roth” contributions will generally be included in a participant’s gross income for the year in which the contributions are made – unlike regular, pre-tax matching or other pre-tax employer contributions.

As more guidance becomes available (for example, on how plans should allow participants to elect to receive “Roth” matching contributions), we will update this article.