Plan sponsors have an option to incorporate a true-up provision into their employee benefit plan(s). True-up adjustments are done at the end of the plan year in order to ensure that the amount of employer matching contributions is grossed up to maximum allowable benefit per the plan document; they protect the less savvy participants from receiving a lesser employer match.
Since employer contributions are typically made as a percentage of period compensation, there is frequently a difference between the sum of employer contributions throughout the year and the amount of employee contributions calculated on total compensation at the end of the year. For instance, if the employer matches 100% of employee contributions, up to 6% of total compensation:
- A participant who contributes 4% for the first half of the year and 10% for the last half of the year – without a true-up provision this participant would only receive employer matches equal to 4% of compensation for the first half of the year and the maximum of 6% for the last half of the year; or,
- A participant who contributes 25% of their compensation each paycheck, and they max out during the year, will not receive employer matches during their max out period because they are no longer able to make employee contributions – without a true-up provision this participant would only receive 6% of compensation up until max out and then nothing for the rest of the year.
With a true-up provision both of these employees will end up with total employer contributions of 6% of total compensation at the end of the year. These provisions help plan participants to achieve the highest employee match possibly due to them.
It is necessary to read plan documents to determine if they contain these provisions. It is also noted that plans can elect quarterly true-up provisions instead of an annual provision. Less sophisticated plans may be at a higher risk of failing to gross up employer matches at the end of the year, which could result in:
- Significant variances between employer contributions made and required per the plan;
- A shortfall in employer contributions; as well as,
- A potential for lost earnings for participants.
If true-up contributions are missed, this issue should be discussed with ERISA counsel and your auditors to determine the proper correction as soon as possible.
By Kristi Ray