What Is a 401(k) True-Up?

What Is a 401(okay) True-Up?

A real-up is a provision in some 401(okay) plans that requires an employer to make an extra end-of-year contribution to an worker’s account if the worker hasn’t obtained the complete match they had been entitled to beneath the phrases of the plan. This text explains what a true-up means for workers and employers.

How a 401(okay) True-Up Works

On the earth of 401(okay) and 403(b) outlined contribution plans, a true-up is a strategy to ensure that any worker who participates within the plan receives an employer match that displays their whole contribution for the yr, relatively than a lesser quantity. The time period most probably derives from the verb “true,” which means the act of creating one thing sq., stage, or balanced, equivalent to a chunk of lumber or a desk noticed.

Not each 401(okay) plan has a true-up provision and, even when it does, not each worker will obtain one. True-ups come into play solely in plans that specify their employer match on an annualized foundation whereas calculating their matching contributions on a per-paycheck foundation. Below regular circumstances, most staff ought to obtain the whole match they had been entitled to by the tip of the yr.

In some circumstances, nevertheless, an worker will probably be shortchanged—and a true-up will change into needed. Take, for instance, an employer who affords a dollar-for-dollar match on as much as 5% of an worker’s wage. If an worker makes $100,000 a yr, they’d be eligible for a $5,000 match so long as they contributed at the least that a lot. 

Now suppose that worker needs to contribute the annual most to their 401(okay), which in 2022 is $20,500 for anybody beneath age 50 ($22,500 in 2023). They might prepare to have $788.46 withheld from every paycheck over 26 pay durations. Their employer would, in flip, kick in one other $192.31 (5% of their gross wage for that pay interval). On the finish of the yr, their employer match would whole $5,000.

But when the worker needs to fund their 401(okay) extra aggressively and double their contributions to $1,576.92, they’ll max out their 401(okay) contributions for the yr after 13 pay durations. Their employer will make no additional matches over the remaining 13 pay durations, leaving them with a complete employer matching contribution of $2,500. A real-up, if their plan affords one, would add one other $2,500 in order that they obtain the complete $5,000.  

Equally, an worker who made no or low contributions to their 401(okay) at sure factors of the yr however then elevated their contributions may obtain much less in whole employer matches than if their contributions had been unfold evenly over the yr, once more calling for a true-up. This will occur if an worker faces surprising monetary calls for and pauses their contributions or decides to make a big one-time contribution utilizing an annual bonus. 

How 401(okay) True-Ups Have an effect on Staff

A real-up might be useful for workers who be part of their employer’s 401(okay) plan late, make uneven contributions to their plan all through the course of the yr, or entrance load their contributions in order that they max out their account earlier than the yr is over.

As a result of not all plans embrace a true-up provision, it is price asking your plan administrator whether or not yours does. If it would not, attempt to time your contributions to maximise the employer match. That can typically imply deciding on the quantity you propose to contribute through the open enrollment interval and sticking with it for the entire yr.  

In case your plan does provide a true-up, notice that you’ll sometimes obtain it in your account about two months after the plan yr ends. So hold a watch out. 

How 401(okay) True-Ups Have an effect on Employers

True-ups require some additional work on the employer’s half to calculate how a lot they owe their staff on the finish of the yr. A real-up can even imply an extra money outlay, all of it coming due without delay.

Towards these additional prices, employers will need to think about the worth of true-ups as a method of attracting and retaining staff. 

Analysis has persistently proven that 401(okay) plans are extremely valued by staff, although not all take part. A survey by Principal Monetary Group in late 2021 reported that staff ranked employer matching contributions as a very powerful think about reaching their monetary objectives, forward of a balanced funding portfolio and monetary recommendation and steerage.

Across the similar time, a survey by the monetary companies supplier Betterment requested respondents, “What advantages might a potential employer provide that will entice you to go away your job?” On the high of the listing was “a high-quality 401(okay) or one other retirement plan” (with 65%), adopted in second place by “a 401(okay) matching program” (with 56%).

If a 401(okay) plan would not have already got a true-up provision, including one could also be comparatively easy. As a 2019 article on the Plan Sponsor Council of America web site defined, “Re-examine your plan doc—particularly, the employer matching provisions to reconfirm that the match is calculated individually for every payday. Change the match provision to incorporate a ‘true-up,’ which you’ll be able to calculate based mostly on contributions at any time through the plan yr…”

As a closing step, it prompt asserting the change “with nice fanfare,” so this added contact of employer generosity will not go unnoticed or unappreciated.

The Backside Line

A real-up requires an employer to make an extra end-of-year contribution to an worker’s 401(okay) plan account if the worker hasn’t obtained the complete match they had been entitled to beneath the phrases of the plan. Staff will need to examine whether or not their employer’s 401(okay) has such a provision, and employers could need to think about including one to make their plan extra engaging.