Receiving an employer match for your 401(k) is a great perk and encourages employees to participate in the 401(k) programs available. There are several different types and they can differ in timing, amount, restrictions and how they are calculated.
Safe Harbor match
Safe Harbor is a type of match in which employees are immediately 100% vested in employer matching contributions. Any size employer can adopt Safe Harbor 401(k) provisions. The main reason to have this is because it eliminates the annual ADP/ACP and top-heavy compliance testing. This elimination allows highly compensated employees to contribute up to the IRS max without the fear of getting contributions kicked back to them. An employer has the option of matching all eligible employees or just the employees that defer their own pay to the plan. In either scenario, the match must be at least 3% of compensation.
The timing of an employer match also provides for many options. Some employers match each pay period when they process payroll. Others choose to match eligible employees quarterly, or at the end of the year. If the employer elects to provide a percentage match to each employee contribution per pay period, they have the option of adding a true-up provision. A true-up provision requires additional contributions at the end of the year as the annual compensation of an employee is used rather than the compensation broken out in each pay period.
Vesting restrictions are another factor to consider. If your 401(k) has a vesting schedule, that simply means you must work for your company for a certain amount of time before any employer contributions to your 401(k) are 100% yours. The most typical vesting schedules will take three to five years for an employee to become fully vested.
Joe Bang, CPA