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True-Up Contributions

The fourth quarter is the time of year when Plan Sponsors may wish to look back on their Qualified Plans and review all administrative procedures for operational compliance with their Plan Documents. For instance, survey data indicates that approximately 60% of Plans either have a true-up provision or make their matching contribution annually. However not every organization is aware that a true-up contribution may be required. A question you may want to ask is “Are your participants missing out on company match”? If you are calculating your matching contributions on a pay-period basis, then the answer may be yes.

If your employees contribute less than the annual deferral limit, this is not typically an issue. However, if any of your employees reach the deferral limit before year-end or use different contribution strategies during the year, they may lose out on the full company match.

Consider the following example, an employee earns $200,000 annually and is deferring 15% to a Plan with a 6% matching contribution. Shortly after mid-year the employee would have reached the annual deferral limit and no additional payroll deductions would be scheduled to occur. Therefore the employee would only receive matching contributions on approximately half of their compensation. However if this employee had deferred 9% per payroll they would have the same amount of contributions ($18,000) and receive match in every payroll of the year.

A true-up matching contribution at the end of the year ensures that each participant receives the full match amount defined by their Plan Document. True-ups are commonly required when a Plan operationally matches participant deferrals on a per-pay-period basis throughout the year, but the matching formula of the Plan Document states that the employer will match salary deferrals up to a percentage of a participant’s total compensation for the Plan Year.

Now may be a good opportunity to confirm the practice that your organization has adopted and take action if necessary as penalties can be imposed for non-compliance.