Employer Matching Contribution Rules

Employers have the option of making matching contributions when their employees contribute to their own retirement accounts. Most matching contributions, when offered, are available to all employees and are calculated based on the employee's income once the employee contributes the relevant amount. Some critics have called for reforms to this system to provide a stronger benefit to the lowest-income employees who are contributing to retirement accounts.

We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether the rules governing employer matching contributions should be revised.

Below is a summary of the debate that ensued between the two professors.

Their Votes:





Their Reasons:

Bloink: The vast majority of employer matching contributions are paid for the benefit of employees who are already contributing more to their retirement accounts than what is strictly required to obtain the match. That tells us that the matching contribution is not what is motivating those employees to contribute. Revising the rules could more accurately reflect reality. Today, most matching contributions actually go to the highest earning taxpayers—meaning that they aren't primarily benefitting the lower-income taxpayers that they're meant to help.

Byrnes: Employer matching contributions provide a powerful benefit to motivate all employees to contribute to their own retirement income planning. These benefits also provide critical support to lower-income and younger employees who may not have the resources to maximize their savings. When these employees can see their balances begin to grow at a more rapid rate than they could afford on their own, they're going to be much more motivated to continue on that track.

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Bloink: The current regulatory landscape governing employer matching contributions is, in practice, serving to increase and exacerbate pay inequality by providing benefits to the highest earners. Matching contributions are currently typically based on the employee's salary. When we're expressing the employer match as, for example, a 50% match on 6% of the employee's pay, the employee who's earning much more is going to see a far more significant benefit than the lower-income employee whom the match is designed to benefit.

Byrnes: We also have to remember that employer matching benefits are entirely optional. If we overly complicate the rules, we create an administrative burden that could actually have the opposite effect as intended—functioning to discourage employers from offering any matching contribution at all. That's something that we should work to avoid.

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Bloink: We should be examining the actual impact of the rules--regardless of the fact that these benefits are generally available to all employees across-the-board regardless of income level. There's no reason that the rules couldn't be revised to provide a higher benefit that actually phases out for employees with high income levels and the means to fund their own retirement accounts without the need for employer-based incentives.

Byrnes: Rather than turning the regulations on employer matching contributions upside down, we should focus on helping employers educate employees about the benefits of taking advantage of the match--because many employees are not contributing because they simply don't understand the financial benefits. That's not a sign that the rules need to be revised, but it is a sign that employers could be doing more to educate their employees.