Employer Matching Program

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An employer matching program is an employer's potential payment to an employee's 401(k) plan dependent on the extent of an employee's participation in the plan. [1]

Contents

Definition

An employee's 401(k) plan is a retirement savings plan. The option of an employer matching program varies from company to company. It is not mandatory for a company to offer a contribution to their 401(k) plans.

Many companies add to an employee's charity contribution. Through a corporate matching gift program, a company can double or even triple an employee's contribution toward a charity. This should not be confused with an employer matching program. [2]

"100% of the first 6%"

As of 2013, the most common matching program increased to 100% of the first 6%. [3] [4] This program states that once the employee contributes 6% of their gross pay, [5] the employer's contributions stop until the following year. If the employee contributes less than 6% of their gross income, the employee foregoes additional compensation from the employer available to them had they contributed up to the 6% limit. For example, an employee whose annual gross pay is $50,000 contributes $3,000 (6% of gross pay) would receive a $3,000 employer contribution. If the employee contributed more than $3,000 the employee would not receive additional employer contributions. If the employee only contributed $2,000 (4% of gross pay), they would only receive a $2,000 employer contribution leaving $1,000 of potential employer contribution on the table.

Functions

In a 401(k) plan, the contributions are funded by the employee and are often matched by contributions from the employer. The contributions to an employee's [6] 401(k) plan are made from the employee's salary before taxes. These funds grow tax-free until they are withdrawn; at that point the contributions can be converted into an Individual Retirement Account. The funds may also be switched if one changes employers. An employer's matching program is situational and depends on if a workplace offers one. According to the Profit Sharing/401k Council of America, an industry trade group, about 78% of 401(k) plans include some kind of employer match for employee contributions. [5]

In an employer matching program, an employee will typically only receive a contribution from an employer if an employee makes a contribution of their own (e.g., an employer will only match contributions if the employee makes some contribution). Employer matches vary from company to company. The general contribution from an employer is usually 3% to 6% of an employee's pay. [7]

For employees to receive a contribution from their employer, the employee must contribute a specified percentage into a 401(k) plan. The employer will then match that contribution to the retirement plan being offered. The money that is put into the retirement plan is free. Investing in a 401(k) plan is a great way to increase retirement savings and increase the money earned.[ citation needed ]

In a traditional retirement account, the amount one contributes is taken before taxes. On the other hand, a Roth retirement account allows employees to contribute after taxes, with the benefits being withdrawn tax-free in retirement. Usually, employers will specify a vesting period, which is the minimum amount of time an employee must work to claim the employer-matched contributions. [8]

Regardless of how or when an employee stops employment, the money that an employee invests in their 401(k) plan is retained by the employee. [9] The contributions made by an employer may or may not be retained based on the vesting program. To understand this better, a vested employee is one that has worked in a company for a specified amount of time. The employer determines the length of time required to become vested; this is usually a one- to five-year span. A vested employee then becomes eligible to retain all retirement contributions made by an employer. After an employee is fully vested, the employee is eligible to retain the entire amount contributed by their employer, even if they leave the company before retirement. Under federal law an employer can take back all or part of the matching money they put into an employee's account if the worker fails to stay on the job for the vesting period.

Employer matching programs would not exist without 401(k) plans. The Revenue Act of 1978 included a provision that became Internal Revenue Code. Under this act the employees are not taxed on the portion of income they agree to receive as deferred compensation rather than direct cash payment. A 401(k) plan is a long-term money management plan. [10]

Nearly two-thirds of plans provide employer matching contributions today. Most common is a dollar-for-dollar up to a specific agreed percentage of pay which is commonly up to 6% of yearly income. [11] The employer matching program is any potential additional payment to an employee's 401(k) plan. The employer is not responsible to contribute any specific amount to the employee; each agreement is situational according to the workplace. Since the start of a credit crisis and the 2008 recession, companies are either stopping matching programs or making the match available to employees based on whether or not the company makes money.[ citation needed ] In this stage of the economy, with many companies rethinking matching programs. If an employee is lucky enough to establish an employer contribution toward their 401(k) plan, this employer match (or free money) is the biggest benefit of a 401(k) plan given that the future of the economy is unpredictable.[ citation needed ]

Cons of 401(k) plan

These are all concerning issues in a 401(k) plan. Lawmakers failed to structure laws around financial institutions that support them, so that the 401(k) is a secure retirement.[ citation needed ]

Pros of 401(k) plan and employer matching program

The employer matching program and the tax deduction are great advantages to a 401(k) plan; these two alone keep many employees invested.[ citation needed ] Economically 401(k) plans are good because it incentivizes Americans to invest in anything they want and build their wealth with certain tax breaks.

The contribution limits of the 2020 401(k) stated that the contribution limit is $19,500. If an employee reached the age of 50 by December 31, 2020, they could save an additional $6,500 in their 401(k), for a total savings of $26,000. [12]

Related Research Articles

In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans / contracts attractive to employees, and many employers offer this option to their (full-time) workers.

An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's earned income for the taxpayer's eventual benefit in old age. An individual retirement account is a type of individual retirement arrangement as described in IRS Publication 590, Individual Retirement Arrangements (IRAs). Other arrangements include employer-established benefit trusts and individual retirement annuities, by which a taxpayer purchases an annuity contract or an endowment contract from a life insurance company.

A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.

A registered retirement savings plan (RRSP), or retirement savings plan (RSP), is a type of financial account in Canada for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.

Economic Growth and Tax Relief Reconciliation Act of 2001 The "EGTRRA"

The Economic Growth and Tax Relief Reconciliation Act of 2001 was a major piece of tax legislation passed by the 107th United States Congress and signed by President George W. Bush. It is also known by its abbreviation EGTRRA, and is often referred to as one of the two "Bush tax cuts".

In law, vesting is the point in time when the rights and interests arising from legal ownership of a property is acquired by some person. Vesting creates an immediately secured right of present or future deployment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest, or title to the present or future possession of a legal estate can be transferred to any other party, it is termed a vested interest.

Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savings accounts, medical savings accounts, and government bonds. Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.

The 457 plan is a type of nonqualified, tax advantaged deferred-compensation retirement plan that is available for governmental and certain nongovernmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pretax or after-tax (Roth) basis. For the most part, the plan operates similarly to a 401(k) or 403(b) plan with which most people in the US are familiar. The key difference is that unlike with a 401(k) plan, it has no 10% penalty for withdrawal before the age of 55. These 457 plans can also allow independent contractors to participate in the plan, where 401(k) and 403(b) plans cannot.

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).

A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation "SIMPLE IRA", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for retirement. Specifically, it is a type of Individual Retirement Account (IRA) that is set up as an employer-provided plan. It is an employer sponsored plan, like better-known plans such as the 401(k) and 403(b), but offers simpler and less costly administration rules, as it is subject to ERISA and its associated regulations. Like a 401(k) plan, the SIMPLE IRA can be funded with pre-tax salary contributions, but those contributions are still subject to Social Security, Medicare, and Federal Unemployment Tax Act taxes. Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans as compared to conventional defined contribution plans like Section 402(g), 401(k), 401(a), and 403(b) plans.

Thrift Savings Plan Retirement plan for U.S. federal government employees and uniformed service members

The Thrift Savings Plan (TSP) is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services. As of December 31, 2020, TSP has approximately 6.2 million participants, and more than $735.2 billion in assets under management; it is the largest defined contribution plan in the world. The TSP is administered by the Federal Retirement Thrift Investment Board, an independent agency.

The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. Since January 1, 2006, U.S. employers have been allowed to amend their 401(k) plan document to allow employees to elect Roth IRA type tax treatment for a portion or all of their retirement plan contributions. The same change in law allowed Roth IRA type contributions to 403(b) retirement plans. The Roth retirement plan provision was enacted as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001.

Deferred compensation is an arrangement in which a portion of an employee's income is paid out at a later date after which the income was earned. Examples of deferred compensation include pensions, retirement plans, and employee stock options. The primary benefit of most deferred compensation is the deferral of tax to the date(s) at which the employee receives the income.

Defined contribution plan Type of retirement plan

A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings to an individual account, all or part of which is matched by the employer.

A private pension is a plan into which individuals contribute from their earnings, which then will pay them a private pension after retirement. It is an alternative to the state pension. Usually, individuals invest funds into saving schemes or mutual funds, run by insurance companies. Often private pensions are also run by the employer and are called occupational pensions. The contributions into private pension schemes are usually tax-deductible. This is similar to the regular pension.

Oklahoma Public Employees Retirement System

The Oklahoma Public Employees Retirement System (OPERS) is an agency of the government of Oklahoma that manages the public pension system for majority of Oklahoma state employees. 74 Okla.Statutes §§901 et seq. The System provides pension benefits such as normal retirement, disability retirement, surviving spouse benefits and a death benefit.

An Employee Stock Ownership Plan (ESOP) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership.

Employer compensation in the United States refers to the cash compensation and benefits that an employee receives in exchange for the service they perform for their employer. Approximately 93% of the working population in the United States are employees earning a salary or wage.

A Solo 401(k) is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s). The general 401(k) plan gives employees an incentive to save for retirement by allowing them to designate funds as 401(k) funds and thus not have to pay taxes on them until the employee reaches retirement age. In this plan, both the employee and his/her employer may make contributions to the plan. The Solo 401(k) is unique because it only covers the business owner(s) and their spouse(s), thus, not subjecting the 401(k) plan to the complex ERISA rules, which sets minimum standards for employer pension plans with non-owner employees. Self-employed workers who qualify for the Solo 401(k) can receive the same tax benefits as in a general 401(k) plan, but without the employer being subject to the complexities of ERISA.

SECURE Act 2019 United States federal legislation

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Pub.L. 116–94 (text)(PDF), was signed into law by President Donald Trump on December 20, 2019 as part of the Further Consolidated Appropriations Act, 2020.

References

  1. ↑ Ann, Lee (2002-03-21). "HowStuffWorks "How 401(k) Plans Work"". Money.howstuffworks.com. Retrieved 2012-02-06.
  2. ↑ "Matching Gift Programs". doublethedonation.com. Retrieved 2017-06-18.
  3. ↑ "Employers Boost 401(k) Match Contributions, Relax Eligibility". Shrm.org. November 5, 2013.
  4. ↑ "401(k) Employer Match - Consumer Reports". Consumerreports.org.
  5. 1 2 "Archived copy" (PDF). Archived from the original (PDF) on 2012-03-09. Retrieved 2011-05-04.{{cite web}}: CS1 maint: archived copy as title (link)
  6. ↑ "WordNet Search - 3.1". Wordnetweb.princeton.edu. Retrieved 2012-02-06.
  7. ↑ "Employer Matching Program: Free Money For Your Retirement | Retirement Planner". Moneyeconomics.com. Retrieved 2012-02-06.
  8. ↑ "Vested Definition - What is Vested?". Investorglossary.com. Retrieved 2012-02-06.
  9. ↑ Fetini, Alyssa (2008-10-16). "A Brief History Of: The 401(k)". TIME. Archived from the original on October 20, 2008. Retrieved 2012-02-06.
  10. ↑ "Archived copy" (PDF). Archived from the original (PDF) on 2011-04-29. Retrieved 2011-05-04.{{cite web}}: CS1 maint: archived copy as title (link)
  11. ↑ Jones, Rich (2019-06-11). "Basic Introduction to 401(k) Retirement Plans". LifeGuideBlog. Retrieved 2019-09-29.
  12. ↑ "IRS Announces 2015 Pension Plan Limitations; Taxpayers May Contribute up to $18,000 to their 401(k) plans in 2015". Archived from the original on 2015-02-02. Retrieved 2020-06-09.
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