What is the difference between employer matching and profit sharing contributions?
Employer matching contributions and profit sharing contributions are both employer contributions made into the plan on behalf of its participants. However, they differ in the calculation of the contribution amount for each. Employer matching contribution amounts depend on the elective contribution made by each individual participant in a given plan year. An example of this would be a plan that makes a matching contribution of 25% of any elective contributions. Therefore, if a participant elected to contribute $1,000.00 from their salary into the 401(k) plan the employer would contribute $250.00 on their behalf. Profit sharing contribution amounts depend on the compensation earned by a participant in a given plan year. An example of this would be a plan that makes a profit sharing contribution that is 3% of a participant’s W-2 compensation for the plan year. Therefore, if a participant earned $50,000.00 the employer would make a profit sharing contribution in the amount of $1,500.00.
Related Questions
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