True up is a clause in certain 401(k) programs which requires employers to contribute an extra contribution to the employee’s account in the event that the employee doesn’t receive the match that they are entitled to according to the plan’s rules. This article will explain what a true-up is for employers and employees. 1
How does a 401(k) True-Up Functions
In the realm of 401(k) and 403(b) defined contribution plans True-ups are an option to ensure that every employee participating in the plan is eligible for the employee match that is proportional to their contribution over the course of the year, instead of a smaller amount. The word “true-up” is likely to come from the word “true,” meaning the action of creating something that is square, level or level, like an item of wood or tablesaw. 1
There isn’t a guarantee that all 401(k) plan includes an option to match up and even if it does it, not all employees will benefit from one. True-ups can only be used in plans that provide their employers match on an annual basis when calculating the matching contributions on an individual basis. In normal circumstances, employees should receive the total match to which they are entitled at the time the year’s end. 1
In some instances employees may be underpaid and a true-up may be required. Consider, for instance an employer that provides the possibility of a dollar-for-dollar match to up to 5 percent of an employee’s pay. If an employee earns $100,000 annually then they’re qualified for a match of $5,000 provided they contribute at least the amount.
Imagine that an employee wishes to contribute the maximum amount per year in their 401(k) which, in 2022 will be $20,500 for anyone who is younger than fifty. 2 They can arrange to be able to have $788.46 taken out of each paycheck over the course of 26 pay period. The employer would be able to contribute an additional $192.31 (5 percent of their total salary during that time period). When they finish the year their employer contribution would be at least $5,000.
However, if an employee decides to contribute to the 401(k) more efficiently and increases their contribution to $1,576.92 Then they’ll be able to max out all of their 401(k) contributions for the year following thirteen pay period. The employer will not offer match for those remaining pay cycles giving them a total employer match of $2,500. True-up, if the plan provides one, would increase the amount by $2,500, so they get the entire $5,000.
In the same way the employee who contributed minimal or no or low contributions towards the 401(k) at specific points in the year, and then increased their contributions could receive less employer match as compared to if their contributions were equally distributed throughout the entire year, thereby calling for an increase. This is a possibility if an employee is faced with unexpected financial obligations and stops the contributions or decides to make a huge single contribution as a bonus.
What 401(k) True-Ups Impact the employees
A true-up could be advantageous for employees who enroll in the company’s 401(k) plan later and make irregular contributions to their account over the each year. They can also even frontload the contributions of their employees to can max out their account prior to the end of the year.
Since not all plans offer an option to make a true-up claim you should ask the plan administrator if yours has one. If not, ensure that your contributions are timed to make sure you get the maximum employer match. This usually means selecting the amount you’ll make during your open enrollment timeframe and sticking with it throughout the entire year.
If your plan includes an accurate up, remember that typically you’ll receive it to your account around two months after your plan year is over. Keep an eye on it.
Which 401(k) True-Ups Influence Employers
True-ups need some extra effort on the part of the employer to figure out the amount they owe to them their workers at close in the calendar year. A true-up could also lead to an additional expense in cash and all of it will be due in one go.
In the face of these additional costs Employers should think about the advantages of true-ups in terms to attract and keep employees.
Studies have consistently demonstrated the fact that 401(k) programs are widely appreciated by employees, even if they may not be used by everyone. A survey conducted by Principal Financial Group in late 2021 found that employees considered employer match contributions as the top aspect in achieving their financial goals.
prior to an investment portfolio that is balanced, as well as financial direction and advice. 6
At the same time, an online survey conducted by Betterment, a financial services company Betterment asked respondents “What advantages could an prospective employer provide that could make you want to quit your current job?” Top of the listing was “a premium 401(k) or another pension plan” (with 65percent) and was followed in second position with “a 401(k) match plan” (with 56 percent). 7
If your 401(k) plan does not already have a true-up clause the process of adding one is quite easy. As a 2019 article on the Plan Sponsor Council of America website explained, “Re-examine your plan document–specifically, the employer matching provisions to reconfirm that the match is calculated separately for each payday. Modify the match provisions to include a true-up which you could determine based on contributions at any point during the plan year. …” eight
In the last step it suggested that the changes “with huge fanfare,” so this added gesture of generosity from employers won’t be overlooked or ignored. 8
Does the employer have a maximum match for 401(k) plans?
There isn’t a specific limit on the maximum percentage of employers to match. For 2022 however the total amount of employer and employee contributions should not exceed $61,000 for people under 50 years old, or $67,500 for those aged 50 and over. 9
Can Employers Modify Their 401(k) matching Formula?
With a traditional 401(k) plan, employers could increase or decrease the amount of their contribution each year, or completely eliminate it. 10 They must amend your Summary Plan Description to reflect this.
Can You Modify Your Employee’s 401(k) Contribution during the year?
Yes, but the frequency will depend on the guidelines of your plan. Certain employers limit members to one alteration per year, while some do not have any limits.