How Does a 401(k) Employer Match Work?

Tom Gilmour is a senior director of Planning Experience Integration for Northwestern Mutual.

When it comes to saving for retirement, there are few options that beat a 401(k). It can provide powerful tax advantages and allow you to put in a lot of money. But you might be able to get even more benefits out of a 401(k). If your employer gives you a 401(k) employer match, it can help you supercharge your savings.

Below, you’ll learn some 401(k) basics. Then you’ll get a closer look at what an employer match is, how it works and how you can get the most out of one.

401(k) Basics

A 401(k) is a type of retirement account that your employer sets up or “sponsors.” You can contribute to a 401(k) only if your employer offers one. If not, your job might provide another way to save for retirement, like a 403(b), 457(b) or SIMPLE account—or you could consider an individual retirement account (IRA).

How does a 401(k) work?

A 401(k) is often called a “tax-advantaged plan” because it offers powerful tax benefits, which vary depending on the type of 401(k) account you have.

• When you contribute to a traditional 401(k), the money is pretax income. This means that your taxable income is reduced in the year that you make your contributions, lowering your tax bill. Then your contributions grow tax-deferred until retirement, allowing them to take full advantage of compound interest. And you pay taxes only when you begin making withdrawals, at which point the money you take out will be taxed as ordinary income.
• A Roth 401(k) works a little differently. When you make contributions to a Roth 401(k), those contributions are made with after-tax money. This doesn’t lower your tax bill in the year that you make the contributions—but it means you’ll pay no income tax when you make withdrawals during retirement.

How much can you contribute?

For 2025, the maximum amount you can contribute to your 401(k) is $23,500. This is significantly higher than the annual limit for an IRA, which is just $7,000.

Older workers are entitled to make additional catch-up contributions that boost this limit. If you’re 50 or older, you can contribute up to another $7,500 for a total of $31,000 in 2025. If you’re aged 60, 61, 62, or 63, you can contribute up to $11,250 more than the regular contribution limit for a total of $34,750.

What happens if you leave your employer?

If you leave the employer sponsoring your 401(k), you may have a few options:

• Leave it where it is: If the sponsoring employer allows it, you can simply leave your 401(k) there. This may seem like the easiest option, but it means you’ll have to keep track of multiple accounts.
• Roll it over to your new 401(k): If you’re eligible for a 401(k) with your new employer, you can request a 401(k) rollover, which will move all of your money and investments to your new 401(k).
• Roll it over to an IRA: Alternatively, you may opt to do an IRA rollover, which will allow you to move your old 401(k) to an IRA. Some investors find this option gives them more control over the types of investments they can make vs. a 401(k).

401(k) company matching

A 401(k) company match, also called an employer match, is a benefit offered by many employers. The company agrees to match a certain amount of the money when the employee puts money into their 401(k). Many consider it to be “free money”—a reward you earn by saving for retirement.

Employer matching is also commonly available for other types of retirement accounts—like 403(b)s, 457(b)s and SIMPLE accounts.

How does a 401(k) employer match work?

While many employers offer a company match to help attract and keep workers, they are not required to offer it. This means that employers are allowed to establish their own policies for their match. The employer decides how and when it will make its contributions, how those contributions will vest (when they actually become yours) and how much the company will contribute. There’s often a limit to how much of your money the company will match.

You can get instructions from your Human Resources contact on how to set up the 401(k). You might be able to have money automatically moved from each paycheck into the 401(k). This might help you stick to your savings goal because the money won’t be in a checking account (where it’s easier to spend).

How do employers make 401(k) contributions?

The two most common methods that employers use to make contributions are partial matching and dollar-for-dollar matching:

• Partial matching: Your employer matches a percentage of your contribution, up to whatever limit they have set. A 50 percent partial match is common. If your employer offers a 50 percent partial match, then when you contribute $1,000, the company will contribute $500—until the limit is hit.
• Dollar-for-dollar matching: Your employer matches each dollar you contribute to your 401(k), up to their limit. This can make it easier to claim the full employer benefit versus partial matching. It’s also called full matching.

Some employers will mix these two methods together. For example, you could get a dollar-for-dollar match up to a certain point and then switch over to a partial match until you’ve hit the match limit.

How does an employer match vest?

When your company contributes to your 401(k), it doesn’t always mean that money immediately becomes yours. It might—or you might have to wait for it to vest before it officially becomes a part of your retirement portfolio. It all depends on your company’s vesting schedule:

• Immediate vesting: Any employer match immediately becomes yours.
• Graded vesting: Employer contributions become yours gradually over a set number of years. For example, if your company has a four-year vesting schedule, 25 percent of the company match will become yours each year you are employed with the company.
• Cliff vesting: None of the company match belongs to you until you have been with the company for a certain amount of time.

Many employers use their vesting schedules to entice their workers to stay with the company and reduce employee turnover. But there are limits: Federal law requires employees to become fully vested within six years of employment for graded vesting and three years for cliff vesting.

What is a good 401(k) match to have?

Most employers that offer a company match will set their maximum contribution as a percentage of your salary. If you earn $80,000 per year, for example, and your company offers a 4 percent match, that means that your company will contribute up to $3,200 to your 401(k) each year.

What counts as a “good” company match is hard to say. Any match at all is certainly better than no match, but the higher the better. One way to think about it is to look at the average company match. According to Vanguard that number in 2023 was 4.6 percent. Anything above this could be seen as better than average.

Example of a 401(k) company match

Let’s imagine a worker earns $100,000 per year. Their employer agrees to match contributions dollar-for-dollar up to 6 percent of their salary. To claim the full company match, the employee would need to contribute at least $6,000 themself. The company would put in another $6,000 for a total of $12,000 into the 401(k).

Instead of a dollar-for-dollar match, the company might offer a partial match of 50 percent. To claim the full company match, the employee would still need to contribute $6,000 of their own money to receive a maximum company contribution of $3,000 for a total of $9,000.

Getting the most out of your 401(k) company match

A company match truly is free money that can give you a jump start on your retirement savings goals. If your employer offers a company match, there are steps that you can take to maximize the benefits that it offers, including these:

Consider the match during job searches

Because a company match can be such a powerful benefit, it’s important to at least consider it when you are looking for a new job, submitting applications and interviewing. Know whether the company offers a match before you accept a job.

Contribute enough to claim the full match

The more money you invest in your 401(k) today, the more you should have in retirement. That’s why many financial professionals would recommend you contribute at least enough money to claim the full company match you’re entitled to, so long as it’s within your budget. Once you hit that milestone, consider going even further by maxing out your 401(k) each year. It’s worth noting that the company match doesn’t count against your contribution limit (detailed above).

Understand your vesting schedule

If you leave your employer before you’ve fully vested into any company match, you’re forfeiting money that you could use in retirement. It’s important to know how your company’s match vests and how much you get when you leave. The answer could affect when you quit a job.

Get expert advice

Your Northwestern Mutual financial advisor can help make your retirement savings work to your advantage. Your advisor can ask deep questions to understand you and your goals. Then they can help develop a plan for today that lasts through retirement.

And when you stop working, your advisor can help you make the most of your retirement income. Together you can develop a tax-efficient 401(k) withdrawal strategy that’s coordinated with the rest of your financial picture.

All investments carry some level of risk, including loss of principal invested. No investment strategy can guarantee a profit or protect against loss.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.