The Truth about 401(k) True Ups!

Each year, we predictably get from employers this question; “Why must we true up our retirement plan if we’re matching the employee deferrals each pay period? We should be current”. Sounds like a fair question! As it turns out, it’s fairly common. It happens whenever you’re funding the employees’ matching contribution throughout the year but the matching contribution in your 401(k) plan document is defined as using the “Plan Year” as a determination period and not “each payroll”. This means even though you are sending in matching funds throughout the year to the employee accounts based on each individual payroll, there is generally going to be a “true up” at year end to determine the match limit on full year compensation. Another way to say it is the match formula is to be applied to the annual totals.

Let’s look at an example:

Employer matches 100% of the first 3% of employee compensation and includes the match deposits with their bi-weekly payroll submission. Employee Bob Smith makes $40,000 a year and contributes 2% of his compensation the first six months of the year. In dollars, he deferred $400 and received a match of $400. For the second six months, he contributes 10% of compensation equating to $2,000 of deferrals and $600 in matches. For the year, his totals are $2,400 of salary deferral and $1,000 of employer match. All settled, right? Not exactly. Because Bob deferred 6% for the year ($2,400 / $40,000), he is entitled to a full match of 3%. $40,000 x 3% = $1,200. Bob is owed a $200 true up.

If this true up is problematic, you should be able to amend your plan document to calculate the matching contribution on compensation for each payroll, instead of by plan year. This will eliminate your year-end true up requirement.

 

Kris Feldmeyer, Vice President/Retirement Plan Advisor

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