If your employer has a "true up" feature on the company 401(k) plan, you're sitting on a valuable extra benefit to your retirement dollars. An annual true up means your plan should always get the maximum amount of possible matching funds under the plan's contribution guidelines. This feature permits employees to receive employer matches they might otherwise have missed, either because of front-loading the 401(k) or spreading out 401(k) contributions out unevenly during the year. Think of front-loading as putting in your annual 401(k) in a lump sum, rather than the opposite tack of dollar-cost averaging when funds are credited to your 401(k) monthly.
Employer Matching Funds
Many employers have a matching program to fatten an employee's 401(k) account. The employer usually matches all or a portion of the employee's contribution up to a certain percentage of that employee's salary. For example, it may be 50 percent of the employee's contribution up to 6 percent of his salary. Matching funds are usually calculated for each pay period, but any changes you make could alter the year-end total. A true-up is how the company evens things up so you get what you deserve.
Earning Matching Funds
The way a true-up works is fairly simple. It looks at what the company gave you and compares it to what you should have received. If the real total is lower than the projected total, the difference is added to your account. For example, if a worker decides to front-load her 401(k) during the first two quarters, she could miss out on the employer match for the final two quarters. A true-up corrects this imbalance.
You could benefit from a year-end true up if you contributed below the maximum matching level for part of the year and above the maximum match percentages for the rest of the year. For example, your employer pays matching funds for up to 6 percent of your salary. You contribute 4 percent half of the year, and then 8 percent for the other six months. At the 4 percent level you did not max out the matching funds. A year-end true up would work it out so you end up getting the 6 percent.
An employee can also miss out on matching funds if he reaches his contribution cap too early in the year. Naturally, if he's not adding money to his own fund, the company has nothing to match. For instance, a highly compensated employee fully funded her 401(k) by April 15. The company funds for the year ended up being 70 percent less than if the employee's contributions had been spread throughout the year. With no true-up, the employee missed out on those funds.
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