Employer match vs direct contributions?

Submitted by r4ipie t3_11do2aj in personalfinance

I apologize if this was already asked somewhere. I've read a ton of posts but can't seem to find exactly what I'm looking for.

My employer matches up to 3% of eligible compensation. That part I understand.

But on the site, under this, it also states "your employer will make a direct contribution of 5% of your eligible compensation."

What's the 5% direct contribution?

Of course, I know I should contribute as much as possible, and I will when I'm in a better spot financially. But does this mean I should elect to contribute 5% rather than 3% to my plan?

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trmoore87 t1_ja9s8oj wrote

No, it means they will contribute 5% regardless of what you do, and they will add another 3% to match.

You put in 0%? get 5%

You put in 3%, get 8%

You put in 1%, get 6%.

The normal terminology for the 5% they are putting in is "safe harbor".

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guzzijason t1_jaa0ybj wrote

This is my take on it as well (further color added in a separate comment thread).

I think people tend to misunderstand the employer "direct contribution" because (at least in my experience) it seems rare that employers actually do that. Employers directly contributing PLUS offering a match seems like a nice plan.

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r4ipie OP t1_ja9v34p wrote

Thank you so much for this explanation!!

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trmoore87 t1_ja9vbvr wrote

No problem! I would still check with your HR to make sure.

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BeeeeefJelly t1_ja9siwy wrote

My interpretation of that is your company puts in 5 percent no matter what, but will match up to an additional 3 percent if you contribute that percent. The wording isn't clear though. You might be better off asking HR.

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_Nuba_ t1_ja9s504 wrote

You should ask your company, but that may be that they will contribute 5% regardless of whether you contribute anything or not.

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sunny-day1234 t1_ja9s66q wrote

Those two percentages should match. The employer usually takes it out of your check and you never see it. Maybe they used to match 5% and now lowered it to 3%? Is it a new job, or have you been with them for a while?

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r4ipie OP t1_ja9tm7a wrote

I've been with the company for four years but I never paid much attention to my retirement account. I just went on today to see my balance and noticed this. The wording is so confusing.

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guzzijason t1_ja9yz5y wrote

>Those two percentages should match.

Not necessarily. Employers have the ability to directly contribute to an employee's 401(k). These contributions would not count against the employee's annual contribution limit. These direct contributions are also not necessarily the matching portion either.

Per the IRS:

>In addition, in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both.

(that's "in addition" to the employee's deferral election).

Some hypothetical numbers: Let's say the employee is making $150k/year.Employer's stated direct contribution would be 5% of that ($7,500). That's with the employee doing nothing, and contributing nothing on their own. There is no payroll deduction from the employees paycheck, rather this is money paid directly from the company into the 401k. Nice!

Now let's assume the employee decides to contribute 10% ($15,000).Now the employer match (up to 3%) kicks in, and they add and additional $4,500.

Employer direct and employer matching contributions do not count against the annual employee contribution limit, so total contributions for the year in this case would be $27,000.

Note: for 2023, the employee contribution limit is $22,500. However, the TOTAL contribution limit (including employer direct and match contributions) is actually $66,000.

OP should definitely confirm this with their HR, but based on the info they gave here, this looks like a fairly generous plan. OP should definitely contribute and not leave that additional 3% match on the table.

(edit: math is hard SMH)

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r4ipie OP t1_jaarlja wrote

Thank you so much for this detailed response. I was looking into my transaction history and it looks like this definitely is the case. I had no idea they were just giving me basically free money for my retirement account.

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