What is the difference between Employer Profit Sharing, Employer Matching and Employee Salary Deferral contributions?

An employee salary deferral is an amount that the plan participant elects to defer from their compensation to an employer sponsored 401(k) plan. Such amounts are 100% vested (owned by the participant) when contributed to the plan because essentially it is your pay to begin with and you have elected to have the employer deduct it and contribute it to the plan.

An employer matching contribution is a contribution made by the employer to an employer sponsored 401(k) plan. This contribution is based on a formula related to a participant’s employee salary deferral contribution, therefore, a participant must enter into a salary deferral arrangement to receive such a contribution. However, there may also be other requirements a participant must satisfy in order to receive such a contribution such as having worked at least 1,000 hours during the plan year. This type of contribution is typically subject to a vesting schedule.

An employer profit sharing contribution is a contribution made by the employer to an employer sponsored qualified retirement plan. Eligible participants share in this contribution based on a predetermined formula used to allocate this contribution amount. The plan need not be a 401(k) plan, but if it is a plan participant need not enter into a salary deferral arrangement to receive such a contribution. However, there may be other requirements that an employee must satisfy such as being employed on the last day of the plan year or having worked at least 1,000 hours during the plan year. This type of contribution is typically subject to a vesting schedule.