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.
- Many employers offer retirement savings benefits by matching some or all of an employee's contributions to their 401(k).
- 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.
- Because of taxes and early withdrawal penalties, it's usually not a good idea to take money from your 401(k) if you're not eligible to take distributions.
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 their 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.
An employer may elect to make many different types of contribution matches, including but not limited to:
- A fixed percentage up to a percent of an employee's compensation (i.e. 50% match on the first 6% of an employee's compensation)
- A tiered percentage based on various levels of employee compensation (i.e. 100% match on the first 2% of contributions, then a 50% match on the next 4% of contributions)
- A fixed percentage up to IRS limits (i.e. 50% match on all contributions, up to IRS limits).
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 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.
Most advisors will recommend making the most of your employer's match. This means budgeting for the full amount of their match.
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.
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 2022, the annual contribution limit for a Roth IRA at $6,000, while the annual contribution limit increases to $6,500 for 2023. The limit is $1,000 more for those 50 or older.
Investors can contribute to both a 401(k) and IRA.
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.
What Is the Contribution Limit for a 401(k) Plan?
The annual contribution limit for a 401(k) plan is $20,500 in 2022 and $22,500 in 2023. If you are 50 or older, you can contribute an additional $6,500 in 2022 and $7,500 in 2023.
Will I Lose My 401(k) Match if I Quit My Job?
Yes. If you quit your job you can no longer contribute to your 401(k) via that same employer. If you are not able to contribute then an employer cannot match. Regardless, you are not an employee anymore and they will not match a non-employee account. Your balance will remain in the account and once you start work with a new employer you can roll over your 401(k) to the new employer if you so choose.
In addition, any existing 401(k) match you receive is subject to your company's vesting schedule. If you've vested, you may be entitled to keeping the full amount of your employer's match. If you have not yet fully vested, you may lose a part (or all) of the employer match.
How Much Do Employers Match a 401(k) Contribution?
The amount an employer will match your 401(k) contribution depends on the employer. Some employers will match 100% while other employers will not match at all. The percentage is the decision of the employer as opposed to the IRS or any other government branch.
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.