The Trouble with True-ups: Make Sure You Budget for the Maximum Match

The Basics of the True-Up Match

Employers that give substantial bonuses tend to give their employees the opportunity to contribute the maximum 401(k) or 403(b) deferral amount out of their bonus pay. To ensure that employees who take advantage of this flexibility get the maximum match, the employers have to make sure that their plan document has a true-up match provision.

As an extreme, but perfect example of this situation, we introduce Mr. Take My Bonus, who makes the maximum compensation limit for 2024 of $345,000, and contributes the maximum 2024 deferral of $23,000 out of his first bonus paycheck of the year, hoping to get the maximum match contribution of 100% of deferrals up to 4% of eligible compensation. Without a true-up provision, the only way to get the maximum match is to contribute at least 4% out of each and every paycheck for the year, like his partner Steady Eddie did in the example below:

Can I Make It Up Later if I Need to Stop Deferrals for a While?

Most 401(k) plans allow plan participants to change their deferral elections at any time. Ideally, participants would want to change their elections to increase them, but inevitably, some participants decrease their contributions when their expenses are high or when they simply just want to enjoy their whole bonus. Whether participants who do not contribute evenly throughout the year can get the maximum match depends on whether the plan has a true-up match provision. To illustrate, let’s introduce Mr. Don’t Touch My Bonus and Mr. Willy Nilly:

Mr. Don’t Touch My Bonus contributes 4% of each pay, except for his bonus. Since the plan matches 100% of deferrals up to 4% of pay, Mr. Don’t Touch My Bonus can never get to the maximum match available under the plan. A true-up provision would not help him, even if the plan has one. To get the maximum match, he would have had to defer from all his paychecks like Mr. Steady Eddie’s book. Mr. Willy Nilly, on the other hand, will benefit from his plan’s true-up match provision. Mr. Willy Nilly had several financial challenges throughout the year, but always made sure to make it up to himself, by increasing his deferral percentages at a later date. If his plan provisions called for a payroll-by-payroll computation of the match, Mr. Willy Nilly would not have been able to achieve the maximum match, but he is fortunate. His employer will divide all his deferral contributions by his eligible wages of $345,000 and make a true-up match contribution for him at the end of the year. Although his contributions fluctuated, he will get the maximum match, just like Mr. Take My Bonus.

The Moral of the Story for Participants

Participants who are like Don’t Touch My Bonus, but still want to get the maximum match, need to make up for their unwillingness to be like Steady Eddie, by increasing other contribution percentages, like Willy Nilly does. But that will only work if their employer’s plan has a true-up match provision. If it doesn’t, then the only way to get the maximum match is to be like Steady Eddie, contributing the deferral percentage that gets the maximum match consistently, all the time. There’s also a lesson to be learned by employers who don’t like surprises….

Unbudgeted Contributions are Seldom Welcome

Plan sponsors who don’t realize the implications of an annual computation period can have a very rude awakening when they find out that the payroll system only matches each payroll, but the true-up calculation requires an additional contribution to be made at year end. For employers that give substantial bonuses, the true-up contribution can be significant and truly problematic if it is not expected. Budgeting for the maximum match is the most conservative way for employers to avoid any trouble with true-ups.