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401(k)ology – Annual Match “True Up”

Annual true up contributions are a good thing for plan participants because the provision ensures that each participant receives the full match for the plan year regardless of when they make deferrals throughout the year. Not all 401(k) plans that provide matching contributions include an annual true up provision. In fact, many plans calculate and fund the employer match on a per pay period basis, so a participant that defers only part of the year may be leaving employer match money on the table.

Let’s take a deeper dive into what a true up contribution provides and review how the true up provision can be a benefit for your participants.

How are Matching Contributions Determined?

Matching contributions are based on a formula that is communicated to the employees covered by a retirement plan that permits pre-tax and/or Roth salary deferral contributions, and in some cases after-tax voluntary contributions. There are several factors that will determine what the matching contribution will be for each participant in the plan:

  1. What is the formula? The formula will be the equation used to determine the match. For example, an employer may match 50% of deferrals on deferrals up to 6% of eligible plan compensation. Stated another way, if a participant defers 6% of compensation, then the match they receive from the employer would be 3% of compensation.
  2. What compensation is included? Eligible plan compensation is defined in the plan document. Most plans use some form of wages as reported on an employee’s Form W2; however, each employer has the discretion to include or exclude certain forms of compensation. For example, one plan may exclude commission or bonuses from eligible plan compensation. Another plan may exclude taxable fringe benefits. There are many different definitions of compensation; however, the key factor is knowing what is included for the specific plan. Includable compensation is also limited annually by the Internal Revenue Service. For plan years beginning in 2023, the maximum compensation that can be included in any retirement plan is $330,000 (up from $305,000 in 2022).
  3. What employee contributions are included? Most 401(k) plans provide matching contributions on all salary deferrals regardless of whether the deferrals are made on a pre-tax or Roth basis. Most plans also include age 50+ catch up contributions in determining the match (however, some do not). If the specific plan allows voluntary after-tax contributions, the matching formula may include the after-tax contributions (although not common to do so).
  4. Are there allocation conditions to get the match? Allocation conditions are ongoing requirements to be eligible to receive the match. A “per pay period” match should not have ongoing allocation conditions, while an annual match (funded once after year end) may require a participant to be employed on the last day of the plan year and/or to work a set number of hours (not to exceed 1,000) to be eligible for that year’s match.
  5. What is the computation period? The computation period dictates the mathematical components used to determine each participant’s matching contribution. If the computation period is each pay period, then the formula is applied to deferrals and compensation earned only during that specific payroll period. If the computation period is the plan year, the total deferrals and total compensation for the entire plan year are used to determine each participant’s match.

Best Practices: Employers should carefully review the matching contribution provisions in the plan document with their providers to ensure that the provisions are consistent with how they intend to apply the match.

Matching Contributions – Funding Options

In addition to calculating the matching contribution for each participant, employers must decide when they want to deposit the contributions to the plan accounts. Many employers deposit the matching contributions with each payroll period at the same time the deferrals are deposited to the plan.

A per pay period funded match has many benefits, including dollar cost averaging and account accumulation for the participants. The benefit to the employer is not accruing a large liability that must be funded before the corporate tax filing deadline. It is possible for the employer to deposit the match with each pay period and to provide an annual true up contribution if the plan document includes the “annual” computation period language.

Annually funded matching contributions are typically associated with plans that require some ongoing conditions for the participants to receive the allocation. For example, an employer will not want to deposit matching contributions during the year if the plan requires an employee to be actively employed on the last day of the plan year to be eligible for the match. The issue is that a terminated employee would have money in their plan account that does not belong to them. If a terminated employee takes a distribution during the plan year, they must return the excess match to the plan. That will cause administrative headaches and operational failures that can (and should) be avoided.

Best Practices: Consult with your service providers regarding the matching contribution provisions to ensure that the employer’s intent regarding how it is determined and when it is funded are consistent with the terms in the plan document.

Matching Contribution Case Studies – Calendar Plan Year

Case #1 – Per pay period match without annual true up:

Let’s review two different participants in the same plan that provides a payroll period funded match with no annual true up provisions to see how this option impacts participants.

Both Frank and Sarah make $100,000 annually in eligible plan compensation. The matching contribution formula is 50% of deferrals on deferrals up to 6% of plan compensation. The payments of compensation are the same each pay period.

Frank elects to defer 6% beginning January 1st and does not change his election at any time during the year. Because he defers 6% each pay period, he receives an employer match each pay period equal to 3% (50% times 6%) of his compensation. His annual deferrals are $6,000 and he receives a match for the year equal to $3,000.

Sarah elects to defer 0% between January and June. Starting July 1st, she begins to defer 12% of her eligible plan compensation to make up for the beginning of the year. Her deferrals from July to December are $6,000 (12% of $50,000). The employer match from July to December would be $1,500 ($50,000 times 6% times 50%).

Even though Frank and Sarah both have deferrals of $6,000 in the same plan year, Sarah missed out on the per pay period match for the first six months and is limited by the formula of 50% up to 6% of eligible plan compensation for the months she deferred.

We often see the same scenario play out in reverse, where an employee will “front-load” deferrals at the beginning of a plan year. If the match is calculated and funded per pay period, the employee will miss out on the matching contributions on compensation paid after they have reached the 2023 $22,500 limit (or $30,000 with catch up contributions).

Note: An employer cannot choose to provide a true up to some participants and not to others. Often, a business owner or highly compensated employee will front-load deferrals and will want the full matching contribution for the year even though the plan document states a per pay period match. True-up allocations must be nondiscriminatory and must be a plan provision, so they are either made for all eligible participants or none.

Case #2 – Per pay period match with annual true up:

Same facts as in Case #1 with Frank and Sarah.

Frank will receive the same match because he receives $3,000 based on the per pay period match during the year. However, now Sarah will also receive a match of $3,000 because the plan includes the annual true up provision.

Sarah will receive $1,500 in match on pay periods between July and December. After the end of the plan year, the matching formula will be applied to her annual compensation and deferrals as follows:

Deferrals = 12% times $50,000 = $6,000

Annual deferral rate = $6,000/$100,000 = 6%

Calculated annual match = 50% times $6,000 = $3,000

$3,000 - $1,500 = $1,500 true up allocation owed Sarah

The employer will deposit a true up match contribution to Sarah’s account after 12/31 equal to $1,500. The amount due Sarah is not adjusted for any market gains or losses.

Remember the business owner or highly compensated employee from above? They too will benefit from the annual true up and will receive the full match for the year even though their deferrals were front-loaded to reach the maximum early in the year!

Matching Contribution Participant Notices

In our recent 401(k)ology article, we discussed the new discretionary matching contribution participant notice requirement. That notice should include information regarding the period used to determine the match and the funding frequency. It is perfectly acceptable to have an annually determined match but fund it per pay period (the true up is built in because the match is annually determined – brilliant!). The important piece is letting the participants know so that they can make an informed decision as to the amount and timing of their deferral contributions, so that they maximize their retirement savings.

Safe Harbor Plans

Safe harbor plans that utilize either the Basic Safe Harbor Match formula or an Enhanced Safe Harbor Match formula have unique rules that apply to them that do not apply to plans with discretionary matching contributions.

Safe harbor plans require an employer contribution be provided to non-highly compensated employees to get a “free-pass” on the Average Deferral Percentage Test. Therefore, safe harbor plans are not permitted to include any ongoing allocation conditions to share in the safe harbor match (i.e., cannot include a last day of employment or an hours of service requirement for the match).

In addition, safe harbor plans that do not use the entire plan year for the safe harbor match computation period are required to calculate and deposit the safe harbor match at least quarterly. For example, if the computation period in the plan document is each payroll period, the employer must deposit the match for each plan year quarter no later than the end of the following plan year quarter. Note that the quarterly timing requirement only applies if the computation period for the match is less than the entire plan year. If the plan document indicates that the computation period is the plan year, an employer may deposit the safe harbor match on a more frequent basis but will be required to perform the true-up allocation after the end of the year based on full year of compensation and deferrals.


Matching contributions are an important benefit to employees saving for retirement. An employer provided match is an incentive to save, a reward and retention tool, and a tax deduction to the employer. The Retirement Services team at Newfront is available to assist you with questions regarding your company matching contribution program or other retirement plan questions that may arise.

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Joni L. Jennings

About the author

Joni L. Jennings

Retirement Services Compliance Manager

Joni Jennings, CPC, CPFA is Newfront Retirement Services, Inc. Compliance Manager. Her 30 years of ERISA compliance experience expands value to sponsors of qualified retirement plans by offering compliance support to our team of advisors and valued clients. She specializes in IRS/DOL plan corrections for 401(k) plans, plan documents and plan design.

The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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