What is a true-up and a true-down?
A 401(k) true-up contribution is an additional employer contribution made at the end of the year to make sure employees receive the full match they are entitled to under the plan’s terms. A true-down contribution occurs when an employee has received more in employer match contributions than they were eligible for, requiring an adjustment.
When are true-up contributions required?
A true-up contribution is due when employer contributions are owed to an eligible employee. This may happen in the following scenarios:
- The plan starts mid-year, and employees who begin contributing after the plan start date may not have received their full match.
- An employee becomes eligible mid-year and starts contributing after their eligibility date, which may result in a lower match.
- An employee changes their deferral amount throughout the year, leading to variations in employer match contributions if the plan matches on a per-pay-period basis.
- The plan matches annually instead of per pay period, meaning the final match is calculated based on total contributions for the year rather than each paycheck.
If a true-up is required, the employer must adjust the match contribution to ensure compliance with plan rules. Betterment helps with this during compliance testing. We’ll create a task that allows you to move forward with the correction.
When are true-down contributions required?
A true-down contribution is required when an employee receives a match that exceeds the amount they were eligible for based on the plan’s rules. This can occur if:
- An employee contributes early in the year, receives employer match contributions on a per-pay-period basis, but then stops contributing later.
- A payroll error results in an employer match exceeding the intended percentage.
- The plan’s matching formula applies different limits at year-end than on a per-pay-period basis.
If a true-down is required, the employer must adjust the match contribution to ensure compliance with plan rules. Betterment helps with this during compliance testing. We’ll create a task that allows you to move forward with the correction.
Does every plan require true-up or true-down contributions?
Not all plans require true-ups or true-downs. Whether adjustments are necessary depends on:
- The plan’s matching contribution determination period, which defines whether matches are calculated on an annual or per-pay-period basis. Plans using annual matching are more likely to require true-ups.
- The plan’s compensation rules, as outlined in the Adoption Agreement, determine whether pre-eligibility earnings are included in employer match calculations.
True-up contributions ensure that employees receive the full employer match based on the plan’s terms. True-down contributions prevent overpayments and help maintain compliance. Both adjustments align employer contributions with plan rules, ensuring fair and accurate retirement benefits.
Employers should review their plan document and Adoption Agreement to determine if true-ups or true-downs apply and ensure they are calculated correctly each year.
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