Employers usually limit or stop making matching contributions to 401(k) retirement plans during hard times to save cash and sometimes avoid layoffs. Although the 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 following steps.

Impact of Matching Contribution Cuts

The IRS considers a 401(k) plan a type of tax-qualified deferred compensation plan. An employee chooses to have the employer contribute a certain amount of their cash wages to the plan on a pretax basis. Because contributions are exempt from income tax, they lower your taxable income for the year in which you make them.

Key Takeaways

  • Employers sometimes stop making 401(k) matching contributions during hard times, but the good news is it’s often temporary.
  • If your employer cuts matching contributions it's essential to offset the difference so that you don't fall behind in saving for retirement.
  • It’s possible to make up for the loss by increasing your contributions and/or contributing to a Roth IRA.

A matching contribution is typically a percentage of an employee's salary that the employer contributes to their 401(k) account. Employers are not required to match contributions workers make to their 401(k) plans. The match is simply a means to motivate employees to save for retirement—and not look for a job somewhere else.

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

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

For 2019, the maximum you can contribute to a 401(k) is $19,000; if you're 50 or older, you can add $6,000 in annual catch-up contributions.

For example, if a younger worker earning $50,000 a year contributes 5% of their 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 to Make Up for a Matching Contribution Cut

If your employer cuts or eliminates matching contributions, here are a few things you can do to recover as well as what to avoid:

Increase Your Contributions

Fill in the gap your employer left behind by increasing your own contribution. Don't forget that increasing contributions lowers your taxable income, meaning you'll pay less income tax.

If you can't afford to immediately increase your contribution, find out if your employer has automatic escalation. This allows workers to up their contributions in smaller increments, such as 1% to 2% year.

Finally, don't forget to increase your contributions when you 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). Note that there are income limits that could affect your eligibility to do so. Be sure to check if they apply to you.

Contributions to a Roth IRA are not tax deductible like a 401(k), but withdrawals are tax-free in retirement. This is not the case with a 401(k).

A Roth IRA can be particularly appealing If you believe you are 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 2019, the annual contribution limit for a Roth IRA is $6,000. You can add an additional $1,000 if you’re 50 or older. That's the same amount you can contribute to a traditional IRA, which is an alternative if you don't qualify for a Roth—or prefer to take your tax deduction now.

Don't Tap into Your 401(k)

Withdrawing funds from your 401(k) before retirement is generally never a good idea. If you are younger than 59½ there will likely be a 10% early withdrawal penalty (there are a few exceptions), and the amount you take out is also subject to income tax.


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.

Dipping into your retirement funds early will also mean the loss of tax-deferred growth on the returns from the investments withdrawn.

The Bottom Line

Employers usually limit or stop making their matching contributions during hard times. In fact, many did during the Great Recession. The good news is that the cut is usually only temporary.

A huge gap already exists between the amount of money U.S. employees have saved and what they need to shore up in order maintain their standard of living during retirement. If your employer cuts matching contributions, it's crucial to offset the difference.

You can make up for the loss by contributing more to your 401(k) and contributing to a Roth IRA. And don't forget, it's generally never a good idea to tap your 401(k) funds before retirement.