Capture the 401(k) match and auto-escalate

State-specific flags

The checklist — 12 steps

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1. 1.Locate the Summary Plan Description (SPD) and read the match section

   The **Summary Plan Description** is the plain-English ERISA-mandated document that tells you exactly how your 401(k) works. Find it on your HR portal, benefits portal, or the 401(k) recordkeeper's site (Fidelity NetBenefits, Vanguard, Empower, Principal, TIAA, Schwab Workplace, etc.). If you can't find it, email HR — ERISA § 104(b)(1) requires them to furnish it on request. Read these sections specifically: (a) **Employer Matching Contributions** — the formula. (b) **Vesting** — cliff or graded schedule. (c) **Eligibility** — when you became eligible (some plans have a 1-year or 1,000-hour wait). (d) **In-Service Withdrawals / After-Tax Contributions** — relevant for Mega Backdoor. (e) **Automatic Enrollment / Auto-Escalation** — current default rates. The SPD supersedes any verbal HR conversation; if it's ambiguous, request the full plan document.

2. 2.Determine the match formula and the contribution rate that captures the full match

   Common match structures: (a) **100% of first 3% + 50% of next 2%** — the IRS safe-harbor basic formula; a 5% employee contribution triggers a 4% employer match. (b) **100% of first 6%** — a common enhanced formula; a 6% employee contribution triggers a 6% match (a 100% instant return). (c) **50% of first 6%** — a weaker common formula; a 6% contribution triggers 3%. (d) **Discretionary match** — set annually; check prior-year amounts. (e) **Safe harbor nonelective 3%** — employer contributes 3% regardless of whether you contribute. Compute YOUR floor: the lowest contribution percentage that still captures 100% of the match. **Under-contributing by even 1% is leaving free money on the table** — for an $80k salary on the 3%+2% formula, contributing 4% instead of 5% costs you $800/yr of employer match plus decades of compounding on that amount.

3. 3.Verify the vesting schedule — when employer money actually becomes yours

   Vesting is when employer contributions legally become your property (your own contributions are ALWAYS 100% vested immediately — that's a federal rule). ERISA § 203 permits two vesting schedules for non-safe-harbor matches: (a) **3-year cliff** — 0% vested until 3 years of service, then 100%. (b) **2-to-6-year graded** — 20% at 2 years, 40% at 3, 60% at 4, 80% at 5, 100% at 6. **Safe harbor plans** (the dominant design post-2006) give 100% IMMEDIATE vesting on employer matches — check your SPD for the phrase "safe harbor match" or "QACA safe harbor." **QACA safe harbor** (qualified automatic contribution arrangement under IRC § 401(k)(13)) allows 2-year cliff vesting on the employer match. Why this matters: if you're planning to leave before the cliff, the unvested match is forfeited. Some plans have immediate vesting on employee contributions but graded vesting on match — read carefully.

4. 4.Set your contribution rate to capture the FULL match — at minimum

   Log in to your 401(k) portal (Fidelity NetBenefits, Vanguard, Empower, etc.) → Contribution Elections → set your pre-tax + Roth contribution percentage. **Absolute minimum: whatever percentage captures the full match** (usually 5-6% of salary). **Ideal: the full § 402(g) elective deferral limit** — for 2025, $23,500 ($31,000 with age-50+ catch-up; an additional $11,250 super-catch-up at ages 60-63 under SECURE 2.0 § 109). For 2026, verify the indexed limit via the IRS Rev. Proc. (typically announced in October/November of the prior year). If your plan forces a whole-percent election, compute the percentage that hits the limit: $23,500 ÷ your annual salary. Example: $100k salary → 23.5%, round to 24% or 23%. Rounding up overshoots but the plan will auto-stop contributions once you hit the annual cap (called a "true-up" is separate — see step 11). Changes usually take 1-2 pay periods to take effect.

5. 5.Decide Roth 401(k) vs Traditional 401(k) — split if uncertain

   **Traditional 401(k)** (pre-tax): contribution reduces current AGI; growth tax-deferred; withdrawals in retirement are fully taxable (federal + most states). **Roth 401(k)** (after-tax): no current-year deduction; growth tax-free; qualified withdrawals in retirement are 100% tax-free (federal). Both have identical § 402(g) limits and the employer match is ALWAYS traditional pre-tax (even if you contribute to Roth 401(k), the match goes into the traditional bucket — SECURE 2.0 § 604 permits Roth matches, but adoption is slow; verify your plan). **Framework**: (a) **Current marginal rate < expected retirement rate** → Roth 401(k). (b) **Current rate > expected retirement rate** → Traditional. (c) **Uncertain** → 50/50 split for tax diversification. **State tax matters too** — see the AL / VA / WV state flags below; Alabama residents have a strong Roth-401(k) preference because traditional 401(k) withdrawals are AL-taxed but Roth distributions are not.

6. 6.Enable SECURE 2.0 auto-escalation — +1%/year until the limit

   **SECURE 2.0 Act of 2022 § 101** mandates automatic enrollment AND automatic escalation for 401(k) plans ESTABLISHED after 12/29/2022 (pre-existing plans are grandfathered, though many are adopting it voluntarily). The default: automatic enrollment at 3-10%, escalating 1 percentage point per year to at least 10% (capped at 15%). If your plan has auto-escalation, verify it's ON in your portal settings. If your plan is grandfathered / doesn't auto-escalate, set a recurring calendar reminder for January 1 each year to bump your rate by 1-2 percentage points manually. **Why this works behaviorally**: a 1% pay raise applied to 401(k) before it hits your paycheck never feels like a cut. Most employees go from 3% to 15% over 12 years without ever consciously feeling the increase. This is the load-bearing automation of the entire playbook.

7. 7.Confirm 2025 and 2026 IRS § 402(g) and § 415 limits

   **§ 402(g) employee elective deferral limit** — the cap on what YOU can defer from your paycheck. **2025**: $23,500 (IRS Notice 2024-80). **2026**: verify against IRS Rev. Proc. for the 2026 tax year (typically published October-November 2025). **Age-50+ catch-up**: +$7,500 in 2025. **Age 60-63 super-catch-up (SECURE 2.0 § 109)**: +$11,250 in 2025 (150% of the regular catch-up). **§ 415(c) annual additions limit** — the TOTAL cap on employee + employer + after-tax contributions combined. **2025**: $70,000 ($77,500 with age-50 catch-up; $81,250 with age 60-63 catch-up). **2026**: verify against IRS Rev. Proc. The § 415 cap is what sets the Mega Backdoor Roth ceiling — the difference between § 415 and your § 402(g) + employer match = after-tax contribution headroom (if your plan allows it).

8. 8.Pick the lowest-expense-ratio index fund in the plan menu

   Open your plan's investment menu. Look for: (a) **S&P 500 index fund** — look for ER (expense ratio) under 0.05%. Common tickers: VFIAX (Vanguard), FXAIX (Fidelity), SWPPX (Schwab). (b) **Total US stock market index** — VTSAX, FSKAX, SWTSX. (c) **Total international stock index** — VTIAX, FTIHX, SWISX. (d) **Target-date index fund** matching your expected retirement year — Vanguard Target Retirement, Fidelity Freedom Index, BlackRock LifePath Index. **Avoid**: actively-managed funds charging > 0.50% ER; "stable value" funds as a young person's primary allocation; company stock beyond ~10% of the portfolio (concentration risk compounded with employment risk). **A 20-year difference between a 0.03% ER index fund and a 1.0% ER actively-managed fund on the same portfolio is roughly 20% of ending balance** — this is the single highest-leverage choice in the 401(k) after the match. If your plan's menu is expensive across the board, push HR to add index funds (many plans do when asked) or prioritize an IRA for better fund access.

9. 9.Name and update beneficiaries

   Beneficiary designations on a 401(k) override your will — the 401(k) passes by contract, not by probate. **ERISA § 205 / IRC § 417** requires spousal consent in writing, notarized, if you name a non-spouse primary beneficiary on a 401(k) (unique to 401(k)s; IRAs don't require this). Set both **primary** (usually spouse, 100%) and **contingent** (usually children or a trust). Update after every major life event: marriage, divorce, birth of a child, spouse's death. **Common trap**: divorced employees who never updated beneficiaries leave the ex-spouse as primary — the Supreme Court upheld this in *Kennedy v. Plan Administrator* (555 US 285, 2009) even where the ex-spouse had waived rights in the divorce decree. The 401(k) portal change takes 2 minutes; do it today.

10. 10.Understand in-service rollover and after-tax contribution options (Mega Backdoor)

    Two plan features unlock the **Mega Backdoor Roth** — contributing tens of thousands of additional dollars into Roth per year beyond the $23,500 § 402(g) limit: (a) **After-tax (non-Roth) contributions** allowed in the plan — these are AFTER the § 402(g) limit, capped by § 415(c) minus your deferrals minus employer match. (b) **In-service withdrawals** or **in-plan Roth conversions** — ability to move after-tax money to Roth (either rolled out to a Roth IRA or converted in-plan) BEFORE retirement, so the growth happens tax-free. Read the SPD sections titled "After-Tax Contributions" and "In-Service Withdrawals" or "In-Plan Roth Conversion." Many plans allow one but not the other — the feature is nearly useless without both. If your plan allows both, the mechanics deserve a dedicated execution checklist (separate playbook). If your plan allows neither, skip and max out a Backdoor Roth IRA instead ($7,000 / yr, 2025 limit).

11. 11.Coordinate with separate IRA contributions and confirm any true-up

    The § 402(g) $23,500 limit is the EMPLOYEE deferral cap across ALL 401(k)/403(b)/457(b) plans combined — not per plan. If you have two jobs with two 401(k)s, track the aggregate. IRA contributions are SEPARATE from 401(k) and have their own $7,000 / 2025 limit (plus $1,000 catch-up at 50+). **Traditional IRA deduction phases out** based on income + 401(k) participation — if you're covered by a workplace plan, the 2025 deduction phase-out is $79,000-$89,000 single / $126,000-$146,000 MFJ (confirm each year's ranges). **Roth IRA direct contribution phases out** at $150,000-$165,000 single / $236,000-$246,000 MFJ for 2025 — above those, use the Backdoor Roth. **True-up**: if you front-load your 401(k) and hit the $23,500 cap mid-year, some plans MATCH only on per-paycheck contributions (you lose the match for remaining paychecks); others do an annual "true-up" that catches you up to the full-year match amount. Read the SPD or ask HR which method your plan uses — affects whether you should spread contributions evenly or front-load.

12. 12.Annual review — re-check at open enrollment and every job change

    Once a year (align with open enrollment or January 1): (a) confirm new year's § 402(g) / § 415 limits and raise your contribution percentage accordingly. (b) re-verify the match formula hasn't changed. (c) check the plan menu for any new low-ER funds added. (d) confirm beneficiaries are current. (e) re-evaluate Roth vs Traditional split if your income / bracket shifted. **At every job change**: (a) compute unvested match you'd forfeit by leaving — delay the departure by a quarter if it meaningfully helps. (b) decide what to do with the old 401(k) — leave it in place, roll to the new employer's plan, or roll to an IRA. Rolling to an IRA gives better fund access but complicates Backdoor Roth math via the IRC § 408(d)(2) pro-rata rule (aggregate across ALL traditional / SEP / SIMPLE IRAs for conversion tax). Rolling to the new 401(k) keeps the ERISA creditor protection under 11 USC § 522(b)(3)(C). The right answer is situation-specific.