How Do True-Up Contributions Work?

Q: What is a true-up contribution?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: A true-up contribution is an additional contribution made by an employer to an employee’s retirement account (usually at the end of the year) to ensure the employee receives the full employer matching contribution to which the employee is entitled. A true-up contribution is an optional provision and must be included in the plan document for such a contribution to be made.

Why would an employee not have already received their full employer match? The primary reason is that the employee made elective deferrals unevenly during the year, reaching the elective deferral limit before a full matching contribution could be made. The Experts detailed the math behind this in a prior column, but it is worth revisiting here, as the limits have changed significantly since the publication of that column over a decade ago.

Let’s say we have a plan with a 100% employer matching contribution of up to 5% of pay, and Executive X, who earns $240,000 per year (and is not catch-up eligible), chooses to 20% of pay in 2024. Her contributions, by month, are as follows:

Since Executive X reached the 402(g) limit of $23,000 in June, her elective deferrals (and related matching contributions) ceased. The total employer match for the year is $6,000, which is only 2.5% of pay, well short of the full 5% match provided in the plan. This occurred because Executive X reached her 402(g) elective deferral limit prior to receiving the full 5% match of her total compensation.

In this case, if the plan allowed for a true-up contribution, an additional employer contribution of $6,000 would be made at year-end.

Another type of true-up may occur with individuals who earn in excess of the 401(a)(17) compensation limit ($345,000 in 2024) and who might reach their compensation limit prior to year-end, at which time elective deferrals may continue to be made, but employer matching contributions cease.

Employees who may be affected by such limits should be advised accordingly, including as to the availability of a true-up contribution in the plan. If you are uncertain as to whether your plan contains the necessary true-up language, please check with the individual or entity who drafted the document.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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