No, your employer’s contribution does not count toward your contribution to your 401(k) plan. In 2019, an employee can contribute up to $19,000 (or up to $25,000 if you are 50 or over) regardless of the employer’s contribution amount. These limits are set by the federal government.

As you suggested, many employers match a portion of your contribution, often up to a limit based on your salary. Here’s how this works: Let’s take a situation where an employer matches 50% of your 401(k) contribution, up to a limit of 6% of your compensation. In this case, if you earned $50,000, you would need to contribute $6,000 to your 401(k) plan to obtain your employer’s maximum match of $3,000 (6% of $50,000). If you earned $85,000, you would need to contribute $10,200 to obtain your employer’s maximum match of $5,100 (6% of $85,000). In both cases you are still below the maximum $19,000 (or $25,000 for those age 50 and over) allowed by law, so you could decide to increase your personal contribution. But you are taking the crucial step of maximizing the match you can obtain from your employer.

This extra $3,000 (or $5,100) 401(k) from the employer match is free money, and therefore one of the best retirement investments you can make. Think of it as an immediate 50% return on your investment! So it is always a good idea to set up your 401(k) salary-deferral contribution to maximize your employer match. If you can contribute even more, up to the maximum of $19,000 (or $25,000), so much the better.

Advisor Insight

Scott Gaynor, CFP®, AIF®
KCS Wealth Advisory, LLC, Los Angeles, CA

In 2019, the total contribution limit from all sources is $56,000 if you are under the age of 50 and $62,000 if you are age 50 or older. This includes both employee and employer contributions.

Most commonly, employers match the employee’s payroll contribution (can be 100% match or 50% match) up to a set percentage of the employee’s annual salary. For example, if you earn $60,000 a year and your employer offers a 100% match up to 5% of your salary, then the maximum they will contribute is $3,000, but only if you also contribute at least $3,000 into the plan.

If you only contribute 4%, or $2,400, then your employer’s contribution will be reduced to that amount as well. Therefore, if possible, it is always more beneficial to maximize the match amount your employer offers.