Friday, August 18, 2006

....And the Effect on Company Matching Contributions

A reader asked a great question yesterday in response to my last post about frontloading my retirement accounts. In terms of the company match for my 401(k), do I get more or less money if I fully fund my account within the first 6 months vs. over the course of the entire year?

According to our company website, eligible employees "receive dollar-for-dollar matching contributions...on the first 5% of...benefits pay contributed each pay period." As far as I can tell, there's no dollar cap associated with each paycheck. So, if I contribute the full $15,000 (the 2006 tax limit) in 12 pay periods, as opposed to 24, the company match would still be $750 (5% of that $15,000) for the year. And since the company match is deposited in my 401(k) account immediately, there's the added benefit of time. That $750 will be earning compound interest or dividends for me for at least an additional 6 months.

So, if my reasoning is correct, there's really no down side to frontloading my 401(k) when it comes to the company match.


Tom said...

Unforutnately, this is incorrect.

They match per pay period. If you only contribute for half of the pay periods, you only get half of the match you could. The _match_ will max out for each of the first pay period, but the dollar amount will not.

I went back and forth with HR on this one because our policy wasn't quite this clear, but in the end, you leave money on the table if you don't contribute every pay period.

IRA said...

Tom - Could you check my math?

The max you can contribute in 2006 is $15,000. If you distribute the 15k over 24 pay periods, your contribution is $625 per pay period. The company match is 5% of $625, or $31.25 per pay period. So, over the course of the year, you'd receive a total of $750 ($31.25 x 24 pay periods) from the company.

If you distribute the 15k over 12 pay periods (which is what I did by frontloading), your contribution is $1250 per pay period. The company match is 5% of $1250, or $62.50 per pay period. So, over the course of the year, you'd receive a total of $750 ($62.50 x 12) from the company.

Either way, the company match is $750. You're not leaving any money on the table. But whether you get the $750 earlier or later in the year is up to you.

Tom said...

It's not your math, I don't think. I believe it is the way plans are structured.

I'm pretty good at math, but had to have my HR rep sit down and explain this to me in great detail before I believed him. I would suggest the same to you, if only to confirm that your situation is as you describe.

As a side note, could you double check your percentages? That match seems AWFULLY low based on what I've heard from others and my own plan. Typically, it's a dollar for dollar match on the first 5% of _contributions_, not overall pay. So, if you contribute 5% of your paycheck, they add a like amount. To compare, I average about $650 in matching dollars per _quarter_ based on my company's plan (which is only 50% of the first 6%).

calgirlfinance said...

Hey IRA, From reading through your blog, I think you work where I used to work . . . .and I think Tom is correct. They match the first 5% of your overall pay, not 5% of your contributions. So, in essence, by front loading your 401K, you are leaving money on the table. They may have changed things since I was there, but I would check with HR.osix

Gigi said...

Mine is structure the same way as Tom's and Calgirl. I get 25% on my first 4% contributions. That means, I can front load, but I lose out their money if I pay out early.

I noticed this when I get the occasional overtime payment. My 4% increases and so does their matching.

Good luck with that.