Dear Anna,

Question:  We’ve been funding an employer matching contribution to the 401(k) plan throughout all last year and now I’m being told I must make an additional matching contribution called a “true up”.  My match calculations were right during the year.  There shouldn’t be an additional “true up” needed.  What is going on?

Answer: 

This occurrence is actually quite common.  It happens whenever you are funding the employees’ matching contribution throughout the year but the matching contribution in your 401(k) plan document is defined as using the “Plan Year” and not by “each payroll”.

This means even though you are sending in matching funds throughout the year to the participant accounts based on each individual payroll, there is generally going to be a “true up” at year end to determine the match limit on full year compensation.  Here is an example:

Suzie earns $1,000 each payroll and has $100 set aside as 401(k) withholding each month.  The company funds a 50% match on the first 4% of each payroll to the plan for her in the amount of $20.  This year she received a bonus of $2,000 so instead of annual pay of $26,000 she actually earned $28,000 during 2016.  Suzie chose not to withhold any 401(k) from her bonus so the company didn’t submit any match to her account for that bonus check.  However, when we annualize the match calculation, she is still due a match of 2% on that bonus totaling $40.   $26,000 x 2% = $520 funded during 2016.  $28,000 x 2% = $560 match limit for 2016.  The difference is ($560 – $520 =) $40 still due to Suzie if we use full year compensation instead of each payroll to determine the 4% limit.

When we look at everyone’s actual deposits and compare them to the calculated amount using annual compensation if there is a difference we end up with a “true up” number.  If this amount is calculated after the end of the 2016 plan year it can still be funded by the due date (including extensions) of the 2016 company tax return if you want to include it on that return.

If this true up is problematic, you should be able to change your plan document to calculate the matching contribution on compensation for each payroll, instead of by plan year.  This will eliminate your year end true up requirement.