Why does the “True-Up” Provision matter?

We recently reviewed a new client's 401k plan and found a glaring issue!  Let's dive into why this matters.

A true-up is an end-of-year reconciliation that ensures participants who vary their contributions during the year still receive the full employer matching contribution they would have earned if they had spread out their contributions evenly across all pay periods.

• Without a True-Up:
• If an employee front-loads (maxes out) their 401(k) in the early months, they may not receive a match on later pay periods where no contribution is made, resulting in a lower overall employer contribution.
  
  
• With a True-Up:
• The plan sponsor performs a calculation after the plan year ends, comparing what the participant should have received for the year (as if they had contributed evenly) versus what they actually received on a per-pay-period basis.
  • If the total actual match is less than the total eligible match, the employer makes an additional contribution to “true up” the difference.
    
    

Example

1. Plan Formula: Matches 50% of employee contributions up to 6% of compensation per pay period.
   
   
2. Employee Action: The employee maximizes contributions early in the year, hitting the annual deferral limit by August. For the rest of the year (September–December), the employee has zero contributions per pay period.
   
   
3. Outcomes:
   • Without a True-Up: The employee misses out on matching contributions from September to December because there are no deferrals in those months.
   • With a True-Up: The plan administrator calculates what the employee would have received for the entire year if contributions had been spread out, and makes an additional match contribution if there is a shortfall.

1. Maximizing Match Benefits
   • True-up provisions help participants avoid inadvertently losing out on matching contributions if their deferral strategy changes during the year (e.g., job change, financial constraints, bonuses).
   • Employees who prefer to front-load their deferrals to benefit from market growth (or for budgeting reasons) do not suffer a penalty on the matching side.
     
     
2. Plan Design Considerations and Costs
   • Some employers may opt out of a true-up feature to keep costs lower or simplify administration.
   • However, offering a true-up can be a competitive advantage in attracting and retaining employees, as it ensures they receive the full potential match.
     
     

This can be confusing stuff so if you have any questions, let your PM know on Soraban!