Are you losing out on your 401k employer matching?

Some employees are missing out on employer 401k matching contributions without realizing it.  One way this happens is if their employer does not have a "True Up" feature in the 401k and if the employee makes varying contributions during the year.

Most employers make a matching contribution based on a percentage of the employee contribution and their gross wages.  The big question is if the match is calculated on a Pay-Period basis or an Annual basis.  If the plan calculates matching contributions on a pay-period basis, they are not required to do a True Up, but are required to if the matching is less frequent than per pay period.  The True-Up feature considers all income and all employee contributions made during the year and not just per pay period.  If a plan does not have this feature, employees may miss out on hundreds or thousands of dollars in matching contributions.  Let’s consider two scenarios to see how the True Up works:

Scenario 1:

John, age 55, earns $200,000 per year and plans to contribute the maximum allowed of $24,000 ($18,000 standard plus $6,000 catch-up since he is 50 or older).    His employer makes a 100% matching contribution up to 3% of his gross salary and does not have the True-Up feature.  The match for the full year could potentially be $6,000 ($200,000 x 3%).  If John were to make his maximum $24,000 contribution in the first six months of the year, he will miss out on matching contributions for wages earned the last 6 months of the year.  Here is the math:

John gross salary first 6 months  $100,000
John 401k contribution in first 6 months   $24,000
Employer match (3% of salary in first 6 months)    $3,000

Once John no longer makes contributions, his employer will cease further "matching" contributions since John stopped making contributions.  Once his contributions stop, the matching stops.  He has essentially missed out on matching contributions of $3,000 for salary earned in the last 6 months of the year.  John will also miss out on matching contributions if he ceases contribution for a month or two, before resuming it again. 

Scenario 2:

In this scenario John makes his entire contribution during the last 6 months of the year and his employer has the True Up feature taking into consideration his full year income and contributions.

John gross salary for the entire year       $200,000
John 401k contribution during last 6 months   $24,000
Employer match (3% of salary for last 6 months)   $3,000
Employer match (3% of salary for first 6 months- True Up) $3,000

The employer will consider earnings and contributions for the entire year and make a final matching contribution based on these numbers.  Since John made a contribution of at least 6% of his annual salary during the year, the employer will provide the 50% match of $6,000. 

If you have a 401k plan, it is extremely important to get every possible dollar in employer matching contributions.  If your employer does not utilize a True-Up feature, it is important to make 401k contributions every pay period throughout the year.  Contributing every pay period throughout the year will ensure you receive every available dollar of employer matching contribution.

If you should have questions about your specific scenario or your employer matching calculation, please let us know.  We would be happy to help.

■ Stephen Palm, CFP®

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