Employers usually limit or stop making matching contributions to 401(k) retirement plans during hard times to save cash and sometimes avoid layoffs. Although such a cut is typically temporary, it can derail retirement goals for some employees. It can also create tough decisions for those individuals nearing retirement, such as whether to increase their contributions, reduce goals, or delay retirement.

The blow of the setback can be lessened by taking the steps outlined in this article.

Key Takeaways

  • Employers sometimes temporarily stop making 401(k) matching contributions during hard times.
  • If your employer cuts matching contributions, it’s essential to offset the difference, so as not to fall behind in saving for retirement.
  • It’s possible to make up for the loss by increasing contributions, contributing to a Roth IRA, or both.

How a Matching Contribution Works

The Internal Revenue Service (IRS) considers a 401(k) plan a type of tax-qualified deferred compensation plan. Employees choose to have their employer contribute a certain amount of their wages to the plan before taxes are assessed and taken out. Because contributions are exempt from income tax, they lower an employee’s taxable income for a given year.

A matching contribution is typically a percentage of an employee’s salary that the employer contributes to his or her 401(k) account. Employers are not required to match contributions that workers make to their 401(k)s. A match is simply a retention tool that also motivates employees to save for retirement.

The average company match at the end of the first quarter of 2019 was 4.7% of an employee’s salary and an average of $1,780, according to Fidelity Investments. If an employer with 1,000 employees, for example, decided to suspend its 401(k) match based on the average match, it could save some $1.78 million a year.

When An Employer Match Stops

The suspension of an employer’s match often lowers the morale of workers and dissuades them from participating in the retirement plan. Some people reduce their own contributions or just stop contributing altogether, which can have a big impact on their retirement savings in the future.

For example, if a younger worker earning $50,000 a year contributes 5% of his or her salary ($2,500) and the employer stops the employee’s match for the same amount for a year, that worker will have $13,569 less saved for retirement 25 years later, assuming a 7% annual return.

How Employees Can Offset the Hit

If an employer cuts or eliminates matching contributions, here are two moves an employee can make to recover, as well as one to avoid.

Increase Contributions

Don’t forget that increasing contributions lowers taxable income. Employees who can’t afford to immediately increase contributions should find out if their employer has automatic escalation. This allows workers to increase contributions in smaller increments, such as 1% to 2% each year. Employees should also increase contributions when they get a raise.

Consider a Roth IRA

It's possible to contribute to both a Roth IRA and an employer-sponsored retirement plan such as a 401(k). Income limits could affect eligibility.

Contributions to a Roth IRA are not tax-deductible like those to a 401(k), but withdrawals are tax-free in retirement. A Roth IRA can be particularly appealing for those who think they’re going to be in a higher income tax bracket in retirement. It could also be a wise choice for a younger worker with a smaller paycheck and lower tax rates than an older worker at a higher-paying job. For 2021, the annual contribution limit for a Roth IRA remains at $6,000, unchanged from 2020. The limit is $1,000 more for those 50 or older.

Don’t Tap Into a 401(k)

Withdrawing funds from a 401(k) before retirement is generally never a good idea. For those younger than 59½, there will likely be a 10% early withdrawal penalty (there are a few exceptions), and the amount taken out is subject to income tax. Dipping into retirement funds early will also mean loss of tax-deferred growth on the returns from the investments that are withdrawn.


The average 401(k) balance at the end of the first quarter of 2019, according to Fidelity, and a far cry from what is needed for a comfortable retirement.

The Bottom Line

Employers may limit or stop matching contributions during hard times. The cut is usually only temporary. If an employer cuts matching contributions, offset the difference by contributing more to a 401(k) and contributing to a Roth IRA. It’s also generally a bad idea to tap 401(k) funds before retirement.