Updated: October 5, 2024
401(k) true-up meaning and purpose
A 401(k) true-up is an additional contribution made by an employer to an employee’s retirement savings to meet the plan’s annual matching commitment terms. 401(k) true-ups only occur in plans that offer matching employer contributions. The true-up is made at the end of the year to ensure that employees receive the full match they’re entitled to.
How does a 401(k) true-up work?
To increase participation in 401(k) plans, many employers offer to match a percentage of the amount employees contribute to their account, up to the plan’s limit. This is usually structured as a percentage of the employee’s salary, such as 5%. So if an employee contributes 5% of his salary to his 401(k) plan, his employer would match this for a total annual contribution of 10% of the salary. For example, if the employee earns $100,000 per year, both he and his employer would contribute $5,000 for a total annual contribution of $10,000.
The employer is responsible for making sure that the full 401(k) match is made. However, there are a couple of scenarios where the full amount of the employer match might not be made during the year. This is when a 401(k) true-up would be made to fulfill the employer’s matching commitment. Below are a couple of examples to help illustrate this.
Scenario #1: Employees max out contributions
One of these scenarios is when employees contribute more than the employer’s match (up to the annual contribution limit) to their plan. In our example, let’s say that the employee wants to contribute the maximum amount allowed by law to his 401(k) plan for the year instead of just $5,000. This would be $23,000 in 2024 for employees who are under 50 years old.
To do so, the employee would contribute $884.61 to his account each pay period (based on 26 pay periods during the year). His employer, meanwhile, would contribute $192.31 each pay period to reach the $5,000 annual contribution. But let’s say that the employee frontloads his contributions and makes them all during the first half of the year ($1,769.23 for each of 13 pay periods). The employer wouldn’t make any more matching contributions for the rest of the year because the employee isn’t making any more contributions, leaving the total employer matching contribution amount at just $2,500.
In this case, the employer would make a true-up contribution of another $2,500 at the end of the year to bring the total annual match up to the promised $5,000. In most cases, the funds make their way into the employee’s account within two months of the end of the plan year.
Scenario #2: Employees make irregular contributions
Another scenario is when an employee makes irregular 401(k) contributions throughout the year. Continuing our example, let’s say the employee made a $1,250 contribution once per quarter to meet his 5% minimum obligation to receive a 5% employer match. The employer would only match these contributions up to 5% of each pay period, which would be $192.31, or $769.23 total for the year.
In this case, the employer would make a true-up contribution of $4,230 at the end of the year to bring the annual match up to the promised $5,000. The money typically arrives in the employee’s account within two months of the end of the plan year.
Note that if a plan calculates employer matching contributions on a pay-period basis, 401(k) true-ups are not required. In this case, a true-up would only be required if an error occurs, like if a matching contribution wasn’t credited to the employee’s account for some reason during a certain pay period.
Maximum 401(k) contributions in 2024
There is not a maximum contribution percentage that employers can match. However, total combined contributions by employers and employees cannot exceed $69,000 in 2024 for employees who are under 50 years old, or $76,500 for employees 50 years of age and over. Employers can change their 401(k) matching formula throughout the year.
Are 401(k) true-ups worth it?
401(k) true-ups will require extra time and effort on the part of employers to calculate how much they need to contribute to employees’ accounts to fulfill their matching commitment. They also require a potentially large cash outlay, so businesses likely will want to plan their cash flow with this in mind.
However, research indicates that these costs may be worthwhile when you consider the benefits of offering matching 401(k) contributions as an employee hiring and retention strategy. In a survey conducted by Principal Financial Group, employer matching was ranked by employees as the most important factor when it comes to reaching their financial goals by over 60% of participants.
And in a survey conducted by Betterment, more than half (54%) of employees listed a matching 401(k) program as one of the benefits that could entice them to leave their current job.
Using 401(k) true-up in a sentence
“401(k) true-ups require extra work on the part of our company, but we believe it’s worthwhile from an employee recruiting and retention standpoint.”
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