Let's say an employer matches "the first 4% of salary" an employee puts towards their 401k. Does that mean lower paid employees get less of a perk?

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    How exactly do you define "fair"? – glibdud Aug 23 '20 at 15:51
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    They get 4% of their salary, up to the limit on contributions. It's no more unfair than having some employees being paid more than others. Indeed, you could argue that an absolute dollar limit is unfair to highly-paid employees. All depends on what you think is fair :-) – jamesqf Aug 23 '20 at 16:41
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    @Aganju I'm not sure "care" is the right word choice. I agree with you that they oftentimes choose not to even max out their available match, but I don't believe it's because they don't care, rather it's more likely due to the inability to trade less take home pay today for "bonus" money far into the future. This is one of the main reasons the non-elective Safe Harbor 401k matching strategy was implemented- to force employers to match regardless of employee contribution amount. – TTT Aug 23 '20 at 18:26
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    Bad choice of word, ok. I know all that and I agree. – Aganju Aug 23 '20 at 22:41
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    I believe 'care' is in fact the correct word. I got a job as a 19-year-old for a little above the minimum wage. They had a 401K meeting for everyone who started that year, attended by me and a couple of managers twice my age. When I asked, my co-workers all said they couldn't afford it, but they had money for booze and 'adult entertainment'. Some people are actually too poor to save, others are poor because they don't save. – DSway Aug 24 '20 at 20:39

From the employer to employee relationship perspective, one could argue that no, it is not unfair to have percentage based matching, at least by comparison to the fact that oftentimes bonuses and raises are also granted as a percentage of salary.

However, unlike other tax advantaged perks, such as employee 401k contributions, HSA, FSA, and insurance premiums, all of which generally have the same tax advantaged limits for every employee, employer matching 401k contributions differ in that the amount of the tax advantaged funds effectively increases based on salary. (Note I say "effectively" because the upper limit of $57K exists for everyone, but is unattainable by most because there is typically no mechanism to contribute that much even if you have the money to do so). Note the matching amount is capped based on salary. For 2020 the cap is $285K, which means anyone who makes more than that will receive the same company matching as someone who makes exactly $285K.


There are a series of tests that 401(k) programs have to go through. They are looking to make sure the polices of their 401(k) program do not discriminate against lower income employees. If they fail those tests they have to fix the issues:

If your plan fails the ADP or ACP test, you must take the corrective action described in your plan document during the statutory correction period to cause the tests to pass.

The plan has 2 ½ months after the end of the plan year being tested to correct excess contributions. The plan can distribute excess contributions any time during the 12-month period. If correction is not made before the end of the 12-month correction period, the plan’s cash or deferred arrangement (CODA) is no longer qualified and the entire plan may lose its tax-qualified status. You may correct this mistake through EPCRS. If the employer doesn't distribute/recharacterize excess contributions by 2 ½ months (six months for certain EACAs) after the plan year of excess, the employer is liable for a 10 percent excise tax on excess contributions.

The tax doesn't apply if the plan sponsor makes corrective qualified nonelective contributions within 12 months after the end of the plan year if the plan uses current year testing. However, if the corrective contributions are insufficient for the CODA to pass the ADP test, the tax applies to the remaining excess contributions.

There are two different methods to correct ADP and ACP mistakes beyond the 12-month period. Both require the employer to make a qualified nonelective contribution to the plan for NHCEs. A qualified nonelective employer contribution (QNEC) is an employer contribution that is always 100% vested and subject to the same distribution restrictions as elective deferrals.

Companies have options to avoid getting into this situation. They can auto-enroll new employees. They can tweak the matching rules to encourage more participation. I do know that automatic vesting at 100% helps participation.

I am not sure if all this is done because you have to entice the lowered paid employees to participate because the general matching rules are unfair; or it is just harder to get younger employees to participate in a plan that they don't get access to for 30 or 40 years.

I do remember that when I was younger, I didn't look at it being unfair that higher paid employees saw a bigger match on a dollar basis. The ideas that I had to overcome before starting with the 401(k) were the risks in investing, and the decades delay in getting access to the funds.


Does that mean lower paid employees get less of a perk?

Yes: when looking at the financial value of this kind of 401(k) matching, lower paid employees receive less money from their employers for this perk than employees with a higher salary

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    "lower paid employees receive less money from their employers" Kind of a tautology there, isn't it? – jamesqf Aug 24 '20 at 3:33
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    @jamesqf I thought the context was enough to understand, but I've edited the answer to make it more clear. Thanks for making NLP human performance easier to reach. – Franck Dernoncourt Aug 24 '20 at 3:37

Something that hasn't really been fully addressed in the other answers (although mhoran_psprep comes close) when considering "fairness" is that employees with lower incomes are more likely to need every dollar of their pay to survive. That is, they simply may not have enough space in their budget to be able to afford to give away (albeit for a period of time) 4% of their income, and thus are simply unable to take advantage of the perk.

Also not directly addressed in other answers is the tax benefit of the deferral. A higher-income employee may receive 25% (or more) savings on income tax on deferred income, while a lower-income employee would receive only 10% (or less). (There are specific programs in the tax code that give credits to low-income earners who contribute, but you have to know they exist, at the very least.)

Finally, many low-income employees may not stay at their job long enough to take advantage of the vesting period. If you don't stay long enough to vest, the match is irrelevant. Higher-income employees are more likely to remain with the company long enough to vest (in my opinion).

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