Why does a true-up provision matter? A true-up is found in some 401(k) plans and 403(b) plans. It requires employers to make an additional end-of-year contribution to an employee's retirement account if the employee hasn't received the full match they were entitled to under the terms of the plan. Essentially, it ensures that plan participants receive the complete employer match they deserve. True-ups can be crucial for a few reasons: Uneven Contributions: Sometimes employees contribute unevenly throughout the year. A true-up ensures that their total annual contributions are considered when calculating the employer match. Maxing Out Early: If an employee maxes out their 401(k) contributions early in the year (e.g., by contributing the full annual limit), they might miss out on employer matches for the remaining months. A true-up rectifies this. Fairness: True-ups promote fairness by ensuring that all eligible employees receive the full match, regardless of their contribution patterns. Let’s see how it could work in the real world. Alex earns $100,000 annually and works for a company offering a dollar-for-dollar match on up to 5% of his salary. The 2024 annual contribution limit for those under 50 of age is $23,000. For equally spread out contributions, a true-up has no real effect: - Alex contributes $884.62 per paycheck to maximize his contributions across the entire year of 26 pay periods ($23,000 total). - Employer matches 5% from each paycheck ($192.31). - Total employer match for the year = $5,000. For more aggressive contributions a true-up plays an important role: - Alex decides to double his contributions to $1,769.24 per paycheck. - After only 13 pay periods, they've maxed out their 401(k) contributions for the year. - Employer makes no further matches for the remaining 13 pay periods. - Total employer match = $2,500. Without a true-up provision, Alex would miss out on $2,500 in employer contributions. However, with the provision in place, the employer would make an additional contribution of $2,500 to ensure Alex receives the full match he’s entitled to. If your retirement plan doesn't include a true-up provision, you should seriously consider adding one. It promotes fairness and ensures your employees receive the fruits of their total compensation package. Remember, if you take care of your people they'll help ensure your business succeeds!
Eric Bruns, CFP®’s Post
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CFP® (CERTIFIED FINANCIAL PLANNER)AFC® (ACCREDITED FINANCIAL COUNSELOR)
4moThis is awesome!! Thanks for sharing!