You have an incredible amount of leverage. The company needs you right now. You need to take advantage of that- they are your employer, not your friend- get what you can from them. You don't need to be over the top, but the fact that they are approaching you about a pay increase shows their desperation to keep you. Ask for a little more than they offer- they will almost certainly match if you don't ask for a massive increase.

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.

You are correct- if you leave before 2 years you will lose all the money your employer put into the 401K as a match.