What Is a True-Up Contribution for Employer Matching?
Understand true-up contributions: an employer payment that ensures you receive your full, annual retirement plan match.
A true-up contribution in an employer-sponsored retirement plan is a corrective payment made by an employer. It ensures an employee receives the complete matching contribution they are entitled to for the year, especially if their personal contributions stopped before the year ended. This often happens when an employee reaches the annual contribution limit early. The true-up prevents employees from missing out on potential employer matching funds due to contribution timing.
Understanding Employer Matching Contributions
Employer matching contributions are a common feature of many retirement plans. Employers define their matching formula, such as contributing 50 cents for every dollar an employee saves, up to a certain percentage of their annual pay (e.g., the first 6% of compensation). For example, if an employee earns $50,000 and contributes 6% ($3,000), an employer with a 50% match would contribute an additional $1,500.
Matching contributions are often calculated and deposited on a “per-pay-period” basis, meaning the employer’s match is applied with each paycheck. This method can disadvantage employees who contribute heavily early in the year and reach their annual contribution limit ahead of schedule. Once an employee stops contributing, the employer’s per-pay-period matching also ceases. In contrast, some plans use an “annual” matching approach, where the full match is calculated and contributed once at year-end, ensuring all eligible contributions receive the match regardless of timing.
Calculating a True-Up Contribution
True-up contributions are calculated at the end of the plan year, or early in the subsequent year, to reconcile any disparities in matching funds. The calculation begins by determining the employee’s total eligible compensation for the year, as defined by the plan document.
Next, the maximum matching contribution the employee could have received for the year is calculated based on their total annual contributions and the plan’s specific matching formula. For example, if a plan offers a 50% match on the first 6% of an employee’s $100,000 annual compensation, the maximum potential match is $3,000 (50% of $6,000). This maximum potential match is then compared against the actual matching contributions the employer already made throughout the year on a per-pay-period basis. The difference between the maximum potential match and the actual match received is the true-up amount, which the employer then contributes to the employee’s retirement account.
For example, an employee earning $100,000 annually, with a plan offering a 50% match on contributions up to 6% of pay, has a potential $3,000 annual match. If this employee reaches the 2025 annual employee limit of $23,500 early, their per-pay-period matching might stop prematurely. If they only received $1,500 in matching contributions, a true-up contribution of $1,500 would be made to ensure they receive the full $3,000 annual match. Employees should confirm with their plan administrator if a true-up provision is available.
Impact for Employees and Employers
True-up contributions benefit both retirement plan participants and the companies that sponsor these plans. For employees, the primary benefit is the assurance of receiving the full employer match they are entitled to under the plan’s terms. This mechanism ensures that an employee’s retirement savings are maximized, regardless of how their contributions are spread throughout the year or if they reach annual contribution limits early. It helps to prevent any unintended loss of employer contributions, enhancing the fairness and overall value of the retirement benefit.
For employers, offering a true-up provision can serve as a competitive element in their benefits package, aiding in the attraction and retention of skilled employees. It demonstrates a commitment to employee financial well-being, fostering greater satisfaction and loyalty. Furthermore, a true-up can support compliance with certain regulatory requirements, such as non-discrimination testing, by ensuring that highly compensated employees receive their full match even if their contribution patterns differ from other employees.