What Is a 401(k) True-Up?

A true-up is a provision in some 401(k) plans and 澳洲幸运5开奖号码历史查询:403(b) plans that requires an employer to make an additional end-of-year contribution to an employee's account if the employee hasn't received the full match they were entitled to under the terms of the plan. Here's what a true-up means🌃 for employees and employers.

How a 401(k) True-Up Works

In the world of 401(k) and 403(b) 澳洲幸运5开奖号码历史查询:defined contribution plans, a true-up is a way to make sure that any employee who participates in the plan receives an 澳洲幸运5开奖号码历史查询:employer match that reflects their total contribution for the year, rather than a lesser amount. The term most likely derives from the verb "true"—that is, "to true up"—which is the act of making something square, level, or balanced, such as a piece of wood.

Not every 401(k) plan has a true-up provision and, even if it does, not every employee will receive one. True-ups come into play only in plans that specify their employer match on an annualized basis while calculating their matching contributions on a per-paycheck basis. Under normal circumstances, most employees should receive the entire match they are entitled to by the end of the year.

In some cases, however, an employee will be shortchanged, and a true-up will become necessary. Take, for example, an employer who offers a dollar-for-dollar match on up to 5% of an employee's salary. If an employee makes $100,000 a year, they'd be eligible for a $5,000 match as long as they contributed at least that much. 

Now suppose that employee wants to contribute the annual maximum to their 401(k), which in 2024 is $23,000 for anyone under age 50. They could arrange to have about $884.62 withheld from each paycheck over 26 pay periods. Their employer would, in turn, kick in another $192.31 (5% of their gross salary for that pay period). At the end of the year, their employer match would total about $5,000.

But if the employee wants to fund their 401(k) more aggressively and double their 澳洲幸运5开奖号码历史查询:contributions to $1,769.24, they will max out their 401(k) contributions for the year after 13 pay periods. Their 澳洲幸运5开奖号码历史查询:employer will make no🔥 further matchꦓes over the remaining 13 pay periods, leaving them with a total employer matching contribution of $2,500. A true-up, if their plan offers one, would add another $2,500 so that they receive the full $5,000.    

How 401(k) True-Ups Affect Employees

A true-up can be beneficial for employees who make uneven contributions to the plan throughout the course of the year. This can happen for a variety of reasons. An employee might join their employer's 401(k) plan late in the year, or they might front-load their contributions so that they max out their account early. Or maybe an employee faces unexpected financial demands and pauses or reduces their contributions for a portion of the year. Or an employee receives a bonus and decides to make a large, one-time contribution using those funds. In all of these cases, contributions aren't spread evenly over the year—which would prompt a true-up, if the plan offers one.

Because not all plans include a true-up provision, it's worth asking your plan administrator whether yours does. If it doesn't, try to time your contributions to maximize the employer match. This will generally mean deciding on the amount you൩ intend to contribute and sticking with it for the entire year.  

If your plan does offer a true-up, note that you will typically receive it in your account in the first quarter of the following year.

How 401(k) True-Ups Affect Employers

True-ups require some extra work on the employer's part to calculate how much is owed to employees at the end of the year.

A true-up will also mean an additi♔onal cash outlay. All of it will come due at once.

Against those e🦩xtra costs, employers will want to consider the value ﷽of true-ups as a means of attracting and retaining employees. 

Research has consistently shown that 401(k) plans are highly valued by employees, even though not all participate. A survey by Principal Financial Group found that employees ranked employer-matching contributions as the most important factor in reaching their retirement goals, ahead of a balanced investment portfolio and financial advice and guidance.

Similarly, a survey by the financial services provider Betterment asked respondents, "What benefits could a prospective employer offer that would entice you to leave your job?" At the top of the list was a high-quality 401(k) or other plan (with 65%), followed in second place by a 401(k) matching program (with 56%).

If a 401(k) plan doesn't already have a true-up provision, adding one may be relatively simple. As the Plan Sponsor Council of America (PSCA) states, employers should study your plan document "to reconfirm that the match is calculated separately for each payday." Then employers should make the switch to a true-up, "which you can calculate based on contributions at any time during the plan year." As a final step, the PSCA suggests announcing the change "with great fanfare," so this added touch of employer generosity won't go unnoticed or unappreciated.

The Bottom Line

A true-up requires an employer to make an additional end-of-year contribution to an employee's retirement plan account if the employee hasn't received the full match they were entitled to under the terms of the plan.

Employees will want to check whether their employer's 401(k) or 403(b) has such a provision, and employers may want to consider adding one to make their plan more attractive.