Employer Matching Program
The Employer Matching Program is an employer’s potential payment to an employee’s 401(k) plan dependent on the extent of an employee’s participation in the plan.
Definition
An employee’s 401(k) plan is a retirement savings plan. The option of an Employer Matching Program varies from company to company, it is not mandatory for a company to offer a contribution to your 401 (k) plan. Many companies also contribute to an employees charity contribution. Through a corporate matching gift program, a company can double or even triple an employee's contribution towards a particular charity. However, this should not be confused with the Employer Matching program.
"50% of the first 6%"
The most common matching program is the “50% of the first 6%” this agreement states that once the employee reaches contributions that is equal to 6% of their gross pay, the employer’s contributions stop until the following year. Something to highly consider is that if the employee does not put in at least 6% of their gross income towards their 401(k) plan, the worker then gives up any additional compensation from the employer. In this employer's matching agreement 50% of all employee’s contributions is up to 6% of total income. A clearer example of this is a worker who makes $50,000 a year would get $1,500 from their employer simply by putting $3,000 of their own salary into the plan.
Functions of Employer Matching Program
In a 401(k) plan, the contributions are funded by the employee and are often matched by contributions from the employer. The contributions to an employee’s 401(k) plan are made from your own salary before taxes. These funds grow tax-free until they are withdrawn, at that point the contributions can be converted into an Individual Retirement Account. The funds may also be switched if you change employers. An employer’s matching program is situational, and depends on if your work place offers one. According to the Profit Sharing/ 401k Council of America, an industry trade group, about 78% of 401(k) plans includes some kind of employer match for employee contributions. In an Employer Matching Program, you will typically only receive a contribution from your employer if you make a contribution of your own. If you fail to save a dollar, your company match goes away. An employer’s match can vary from company to company. The general contribution from an employer is usually a percentage of three to six percent of your pay.
In order for an employee to receive a contribution from their employer, they must contribute that percentage into a 401(k) plan and then the employer will match that contribution to the retirement plan they offer. The money that is put into your retirement plan is free. Investing in a 401(k) plan is a great way to increase your retirement savings, and increase the money you earn. The amount you contribute is always taken before taxes. In order to withhold the match if you quit your job you must be vested in a retirement program.
It does not matter how or when you stop employment, the money that you invest in your 401(k) plan is yours to keep. The contributions made by your employer can be argued based on your vesting program. To understand this better, a vested employee means that you have worked in a company for a certain length of time. The employer determines the length of time required to become vested; this is usually a one to five year time span. The importance of being a vested employee means that an employee then becomes eligible for full percentage of contributions by employer. After an employee is fully vested, the employee is eligible to retain the entire amount contributed by their employer, even if they decide to leave the company prior to retirement. Under Federal Law an employer can take back all or part of the matching money they put into an employees account if the worker fails to stay on the job for a certain number of years.
The creation of the Employer Matching Program would not be in existence without the idea of a 401(k) plan. The Revenue Act of 1978 included a provision that became Internal Revenue Code, under this act the employees are not taxed on the portion of income they agree to receive as deferred compensation rather than direct cash payment. A 401(k) plan is a money management plan that should be considered for the long term.
As for the employee and employer contributions, nearly two-thirds of plans provide employer matching contributions today. Most common this year is a dollar-for-dollar up to a specific agreed percentage of pay which is commonly up to 6% of yearly income. The employer matching program is any potential additional payment to an employee’s 401(k) plan. The employer is not responsible to contribute any specific amount to the employer; each agreement is situational according to the work place. Since the start of a credit crisis and 2008 recession companies are either stopping matching programs or making the match available to employees based on whether or not the company makes money. In this stage of the economy, with many companies rethinking the matching program, if an employee is lucky enough to establish an employer contribution toward their 401(k) plan, this employer match (or free money) is the biggest benefit of a 401(k) plan given that the future of the economy is unpredictable.
Related Controversy
There is much economic controversy with the existence of an employee’s 401(k) plan. Without a 401(k) there is no need for an Employer Matching program. Many political consultants have different views on whether or not investing in a 401(k) plan is beneficial. Some say that the money that is given through an Employer Matching program is most beneficial because of the uncertainty of any other contributions made by an employee into there 401(k) plan. The only problem with an Employer Matching Program is that it can not exist without the 401(k) plan, with many important cons in the 401(k) plan there is a possibility that employers may not continue to have the option of offering a "match" agreement to an employee.
Cons of 401(k) plan
- The lack of diversity in investment choices
- lack of security of employee’s contributions
- high expenses due to the expenses built into your 401(k) plan
These are all concerning issues in a 401(k) plan. Politically law makers failed to structure laws around financial institutions that support them, so that the 401k is a secure retirement.
Pros of 401(k) plan and Employer matching program
The Employer Matching Program and the tax deduction are great advantages to a 401(k) plan; these two alone keep many employees invested. Economically 401(k) plans are good because it forces Americans to invest in anything they want and build their wealth with certain tax breaks. Most Americans invest their 401(k) plan with in American soil stock exchanges or banks; this helps the economy because people are inclined to invest back into the economy. The contribution limits of the 2011 401(k) states that the contribution limit is $16,500. If an employee reaches the age of 50 by December 31, 2011, they can save $5,500 in there 401(K), for a total savings of $22,000. This is when Employer Matching program becomes most beneficial because the program allows for free money to be added onto an employees contribution toward there 401(k) plan.
References
Retrieved from : http://en.wikipedia.org/wiki/Employer_Matching_Program
