No! Employer contributions to a 401(k) plan are optional. Some employers “match” the contributions their employees make. The matching contributions are usually a portion of the employee’s 401(k) contributions subject to a cap. If made, these matching contributions are usually invested along with the 401(k) contributions.
Also, employers may make an additional profit sharing contribution. Profit sharing contributions, sometimes called employer discretionary contributions, are usually invested annually at the end of the plan year and are allocated based on your salary.
A matching contribution is an employer contribution that is based on the amount you contribute to the 401(k). Many employers commit to matching a fixed percentage of your 401(k) contributions up to a limit. For example, popular matching rates are 25 cents per dollar up to your savings rate of 6% of salary or 50 cents per dollar up to your savings rate of 4% of salary.
Sometimes the employer match is discretionary. That is, the company decides from year-to-year how much to match.
| Examples of Popular Matches Based on $24,000 annual salary |
|||
|---|---|---|---|
| Company Matching Contribution | |||
| Percent of Salary |
401(k) Contribution |
25¢/dollar up to 6% |
50¢/dollar up to 4% |
| 2% | $480 | $120 | $240 |
| 4% | $960 | $240 | $480 |
| 6% | $1,440 | $360 | $480 |
| 8% | $1,920 | $360 | $480 |
If your employer matches your 401(k) contribution these are usually invested in your account along with your contribution. However, some employers only match at the end of each calendar quarter or even at the end of each year.
A profit sharing contribution is an additional discretionary employer contribution. Discretionary means the company decides each year whether to make a contribution and if so, how much. Usually, companies who make this type of contribution review the company books at the end of the year to see if they make a profit. The company then decides on how much to contribute, if any. These contributions are usually made only once per year at the end of the plan year and are allocated to the eligible employees based on their salary.
Your employer may require you to work over a certain number of hours (e.g. 1,000) and be employed at the end of the plan year in order to share in a profit sharing contribution.
Yes. The Profit Sharing/401(k) Council of America publishes statistics on profit sharing and 401(k) plans. You can access them through www.psca.org. Also, the Employee Benefit Research Institute compiles information about all employee benefit plans at www.ebri.org.
These web sites and many others can provide you with general information about 401(k) plans.