What is a 401k True-Up?
A 401k true-up is a term used to describe the process of reconciling any employer matching contributions that may have been missed by employees throughout the year. It ensures that employees receive the full employer match to which they are entitled.
When employees contribute to their 401k plans, employers often match a portion of those contributions, based on a predetermined formula. This match is an attractive benefit that helps employees save more for retirement. However, most employers calculate their matching contribution on a per-pay-period basis, often referred to as per-pay-period matching. Per-pay-period matching means that employers match a certain percentage, such as 50% or 100%, of an employee’s contribution per pay period, up to a specified limit.
Since many employees don’t contribute the maximum allowed amount to their 401k plans each pay period, they may end up missing out on some of the employer match. This discrepancy occurs when employees fail to contribute enough to receive the full matching contribution from their employers.
A 401k true-up allows the employer to correct this shortfall at the end of the year. The true-up process involves examining an employee’s total annual contributions and comparing them to the matching contributions that should have been made throughout the year. If the employee missed out on any matching contributions, the employer will make up the difference in a lump sum. This ensures that the employee receives the full employer match based on their annual contributions.
FAQs about 401k True-Up:
1. How does a 401k true-up work?
A 401k true-up works by reconciling missed employer matching contributions at the end of the year.
2. Why do employees miss out on employer matching contributions?
Employees may miss out on employer matching contributions if they do not contribute enough to their 401k plans each pay period to receive the maximum match.
3. Who is eligible for a 401k true-up?
Employees who have a 401k plan with an employer matching contribution are eligible for a true-up if they have missed out on any matching contributions during the year.
4. How often is a 401k true-up performed?
A 401k true-up is typically performed once a year, at the end of the plan year.
5. Are there any limitations to a 401k true-up?
The limitations of a 401k true-up depend on the specific terms set by the employer, such as the maximum matching contribution limit or the timing of the true-up process.
6. Can I request a 401k true-up?
Employees generally do not need to request a 401k true-up. It is an automated process carried out by the employer.
7. How does a 401k true-up affect my retirement savings?
A 401k true-up boosts an employee’s retirement savings by ensuring they receive the full employer matching contributions they are entitled to.
8. Do all employers offer a 401k true-up?
Not all employers offer 401k true-ups. It depends on the employer’s specific policies and preferences.
9. Does a 401k true-up have any tax implications?
A 401k true-up generally does not have any tax implications for the employee. The additional matching contributions are treated as regular 401k contributions.
10. Can I make my own true-up contributions?
Employees do not typically make their own 401k true-up contributions. The true-up process is solely performed by the employer.
11. Why is it important to review my 401k true-up?
Reviewing your 401k true-up ensures that you are receiving the full employer matching contributions you are entitled to, helping you maximize your retirement savings.
12. Can I lose my 401k true-up if I leave my job?
If you leave a job before the true-up calculation is made, you may forfeit any unmatched employer contributions that would have been part of the true-up calculation. Policies regarding this may vary by employer.