What Is a 401(k) True-Up?
A true-up is a provision in some 401(k) 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. This article explains what a true-up means for employees and employers.
- A true-up is an additional, end-of-year matching contribution made by an employer to an employee's 401(k) account.
- True-ups are used to make sure that the plan participants receive the full match they are entitled to.
- True-ups may be required if the employee made uneven contributions to the plan during the year or maxed out their contributions early in the year.
How a 401(k) True-Up Works
In the world of 401(k) and 403(b) defined contribution plans, a true-up is a way to make sure that any employee who participates in the plan receives an employer match that reflects their total contribution for the year, rather than a lesser amount. The term most likely derives from the verb "true," meaning the act of making something square, level, or balanced, such as a piece of lumber or a table saw.
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 were 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.
A 401(k) true-up shouldn't be confused with a 401(k) top-up or catch-up. A top-up is an additional, after-tax employee contribution to a 401(k), which is permissible up to certain limits. A catch-up allows employees over age 50 to contribute more to their accounts.
Now suppose that employee wants to contribute the annual maximum to their 401(k), which in 2022 is $20,500 for anyone under age 50 (rising to $22,500 in 2023). They could arrange to have $788.46 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 $5,000.
But if the employee wants to fund their 401(k) more aggressively and double their contributions to $1,576.92, they will max out their 401(k) contributions for the year after 13 pay periods. Their employer will make no further matches 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.
Similarly, an employee who made no or low contributions to their 401(k) at certain points of the year but then increased their contributions might receive less in total employer matches than if their contributions were spread evenly over the year, again calling for a true-up. This can happen if an employee faces unexpected financial demands and pauses their contributions or decides to make a large one-time contribution using an annual bonus.
How 401(k) True-Ups Affect Employees
A true-up can be beneficial for employees who join their employer's 401(k) plan late, make uneven contributions to their plan throughout the course of the year, or front load their contributions so that they max out their account before the year is over.
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. That will generally mean deciding on the amount you intend to contribute during the open enrollment period and sticking with it for the whole year.
If your plan does offer a true-up, note that you will typically receive it in your account about two months after the plan year ends. So keep an eye out.
How 401(k) True-Ups Affect Employers
True-ups require some extra work on the employer's part to calculate how much they owe their employees at the end of the year. A true-up will also mean an additional cash outlay, all of it coming due at once.
Against those extra 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 in late 2021 reported that employees ranked employer matching contributions as the most important factor in reaching their financial goals, ahead of a balanced investment portfolio and financial advice and guidance.
Around the same time, 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 another retirement 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 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. Change the match provision to include a 'true-up,' which you can calculate based on contributions at any time during the plan year..."
As a final step, it suggested announcing the change "with great fanfare," so this added touch of employer generosity won't go unnoticed or unappreciated.
Is There a Maximum Employer Match for 401(k) Plans?
There is no explicit maximum percentage for an employer match; however, for 2022, total employer and employee contributions cannot exceed $61,000 for those under age 50 or $67,500 for those 50 and up (rising to $66,000 and $73,500 for 2023, respectively).
Can Employers Change Their 401(k) Matching Formula?
Yes, with a traditional 401(k) plan the employer can raise or lower their match each year or eliminate it entirely. They will need to amend their summary plan description accordingly.
Can You Change Your Employee 401(k) Contribution During The Year?
Yes, but how often depends on the rules of your particular plan. Some employers limit participants to one change a year, while others set no limits.
The Bottom Line
A true-up requires an employer to make an additional end-of-year contribution to an employee's 401(k) 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) has such a provision, and employers may want to consider adding one to make their plan more attractive.