We all know that we should contribute toward an employer-sponsored retirement account, but are you maximizing your contributions? Let’s layout some facts:

1.  401(k) plans have an annual maximum permitted by the IRS, for 2024 the maximum that an employee can contribute to a 401(k)/403(b) plan is $23,000 for those under age 50, and $30,500 for those age 50 and over.
2. Many employer-sponsored 401(k)/403(b) plans offer a matching contribution from the sponsoring company. A common example is that a company will match an employee’s contribution at 50% for the first 6% the company puts toward the plan. This means that if an employee is deferring 6% of their salary, the employer will add an additional 3%. Some employers calculate this match based on the pay period while others calculate it based on annual wages.

If you are maxing out your contributions and your employer calculates their match on a pay period basis, you may be missing out on matching funds from your employer. Here is an example:

Scenario A:

Employee A is 40 years old and has a salary of $230,000/year. Employee A defers 20% of her salary to the retirement plan. Employee A is paid bi-monthly, resulting in 24 pay periods per year. Employee A’s employer calculates matching funds on a pay period basis. Given these facts, Employee A will reach the $23,000 maximum on her 12th pay period. Beginning on the 13th pay period, the employer will stop withholding contributions from her paycheck and stop making a matching contribution. At the end of the year, Employee A will have contributed the IRS maximum contribution of $23,000 and will have received an employer match of $3,450.

Scenario B:

Let’s use the same fact pattern as Scenario A, except Employee B contributes 10% of her salary. Given these facts, Employee B will reach the $23,000 maximum on the 24th pay period. At the end of the year, the employee will have deferred $23,000 and will have received an employer match of $6,900.

Employee B has received an additional $3,450 in matching funds from her employer at the end of the year.

What can you do to determine if you are maximizing your contributions?

Ask Human Resources if the match is calculated based on an annual calculation or if it’s based on a pay period calculation. Next, check you paystub, how much are you contributing per pay period? How many pay periods are there in a year? If your contribution per pay period times the number of pay periods in a year exceeds the annual maximum, you may want to consider working with your Human Resources department to update your withholding.

Regardless of the calculation method, it is prudent to periodically compare your paystubs to your retirement account statement. Does your withholding from your pay stub match the contribution to your account? Are you able to recalculate the employer’s matching portion? If not, check with Human Resources, they may be able to help.

HBE Is Here To Help

Maximizing your contributions to your employer-sponsored retirement account is crucial for securing your financial future. To get a better understanding of your contributions to your retirement account and to ensure you are making the most of your employer’s matching program, reach out to your trusted HBE advisor today. HBE is here to guide and support our clients in making informed decisions regarding their retirement accounts, ensuring a stronger financial foundation for the years ahead.