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
More Relevant Posts
-
When SECURE 2.0 became law on Dec. 29, 2022, it included an auto-enrollment provision. Under the auto-enrollment provision, employers must enroll eligible employees automatically into any new 401(k) and 403(b) workplace retirement plan established after SECURE 2.0 became law. Employees may opt out of participation. This requirement goes into effect Jan. 1, 2025. Some businesses will be exempt from this mandate, including: Business with 10 or fewer employees Businesses that established a workplace plan before Dec. 29, 2022 Businesses that have operated for less than three years SIMPLE 401(k) plans, governmental and church plans Not sure where you fall when it comes to the Secure Act 2.0 requirements? Moreover, do you not yet have a 401k plan being offered to your employees in those state(s) in which it has become a requirement? Did you know that Paychex is the largest 401k recordkeeper for the 14th year and counting? Let's talk today about how we can help you as new requirements will soon go into effect. Direct: 248.444.8440 Email: Kpettis@paychex.com #401k #retirement #secureact #autoenrollment #HCMTechnology #administration #recordkeeper #employeebenefits
-
Thinking about auto-enrollment for your 401(k) plan? A new report highlights how this feature is driving higher savings and deferral rates among employees. With more employers adopting auto-enrollment, the trend is clear: it's a valuable tool for enhancing retirement readiness. #SECURE2 #AutoFeatures
Vanguard: Auto-Enrollment Continues to Boost Savings, Deferral Rates
plansponsor.com
-
Ted Benna, dubbed the father of the 401(k), has developed a new tax-advantaged employee incentive plan designed largely to help workers who have trouble contributing to a retirement plan. Benna calls his new idea the Wheat Grain Incentive Plan, or WGIP, with the metaphorical grains of wheat representing cash contributions from an employer based simply on an employee consistently showing up for work or meeting performance goals. The program, he says, is designed to help the many people in America’s workforce who do not make enough to save sufficiently in a 401(k), missing out on both the tax advantages and potential employer matches. Details here: https://lnkd.in/ghXMdfFZ #401k #taxadvantages #retirement #retirementplans
Father of the 401(k) Is Planting a New Workplace Savings Idea | PLANADVISER
planadviser.com
-
Your workplace 401(k) can be a powerful retirement savings tool if you use it properly, but there are some easy-to-make pitfalls to look out for. From losing track of plans from past employers to failing to take advantage of contribution matches, here are some of the most common mistakes people make with their 401(k)s.
13 Biggest 401(k) Mistakes to Avoid
insidermonkey.com
-
#PayrollWeek may be ending, but today we’re celebrating National 401(k) Day! 💵 This annual observance lands on the Friday after Labor Day, marking a week that starts with honoring hard work and concluding with a focus on securing your #retirement. 📈 With retirement planning being a priority for many #employees, it’s no wonder the #401k plan remains a top financial benefit for job seekers: https://ow.ly/yHGm50ThpaO #PEO #HR #NPW2024 #employeebenefits #financialwellness
The Top 3 Benefits of 401(k) Plans for Employers
extensishr.com
-
#Milliman is transforming retirement plans by increasing 401(k) participation rates and improving employee retention. How? Through automatic enrollment, a shortened vesting schedule, and effective communication. The result? More engaged, financially secure employees. Learn more here. #401K #DC https://ow.ly/REyK50QYaQs
Case study: Employee-centric strategies for overcoming staffing challenges and boosting retirement savings
milliman.com
-
As with many things in life, in retirement planning it’s important to focus on the things you can control. That includes making sure your 401(k) is set up property to fully benefit from matching funds, IRS deferral limits, and neutralizing volatility through dollar cost averaging.
Is Your 401(k) Contribution Strategy Costing You Money?
advisorstream.com
-
#Milliman is transforming retirement plans by increasing 401(k) participation rates and improving employee retention. How? Through automatic enrollment, a shortened vesting schedule, and effective communication. The result? More engaged, financially secure employees. Learn more here. #401K #DC https://ow.ly/L8W950QYaIX
Case study: Employee-centric strategies for overcoming staffing challenges and boosting retirement savings
milliman.com
-
#Milliman is transforming retirement plans by increasing 401(k) participation rates and improving employee retention. How? Through automatic enrollment, a shortened vesting schedule, and effective communication. The result? More engaged, financially secure employees. Learn more here. #401K #DC https://ow.ly/tIzu50QYaMu
Case study: Employee-centric strategies for overcoming staffing challenges and boosting retirement savings
milliman.com
-
#Milliman is transforming retirement plans by increasing 401(k) participation rates and improving employee retention. How? Through automatic enrollment, a shortened vesting schedule, and effective communication. The result? More engaged, financially secure employees. Learn more here. #401K #DC https://ow.ly/z6UU50QYaNK
Case study: Employee-centric strategies for overcoming staffing challenges and boosting retirement savings
milliman.com
CFP® (CERTIFIED FINANCIAL PLANNER)AFC® (ACCREDITED FINANCIAL COUNSELOR)
4moThis is awesome!! Thanks for sharing!