Explaining True-Up Matches

Plan sponsors, advisers and providers are always recommending defined contribution (DC) plan participants defer enough of their salaries into the plan to receive the full employer match contribution.

In order to make sure participants are maximizing their retirement savings, plan sponsors may offer a true-up match.

What is a true-up match? This type of contribution allows employers or plan sponsors to fund the difference in match contributions for participants who may reach the maximum statutory deferral amount prior to the end of the year or for participants who did not contribute enough for part of the year to receive the full match.

A true-up match is contributed at year-end or one to two months following the new year, largely because plan sponsors must review all funded contributions completed throughout the 12 months, according to Michael Knowling, vice president of Client Relations and Business Development at Prudential.

“It allows [employees] to not leave free money on the table,” Knowling says. “It allows them to maximize their employer contribution or employer matching contribution.”

Knowling says it’s an extra benefit for workers, and it helps plan sponsors by helping participants maximize DC plan savings.

If a plan document includes a provision for a true-up match, who manages the true-up can go two ways, says Knowling: either the recordkeeper can perform the calculation or it can be performed in-house by the plan sponsor.

Plan documents often have wording such as, “the employer will match 50% of salary deferrals up to 6% of the employee’s compensation for the plan year.”   

“Employers are going back and kind of doing the match on [participants] behalf and background, saying, ‘How much do they make, what’s the minimum match they should have received and where’s the gap?’ and they’re applying the contribution on their behalf,” says Meghan Murphy, director at Fidelity Investments.

For a highly compensated employee, Knowling gives this example: “Let’s say an employee is contributing 15% of salary, or $1,500 a month, to the plan, that will allow them to reach the statutory contribution limit by year-end. Let’s just say in that scenario, the company has a matching contribution where they match 50% of the first 10% that’s contributed, in that situation the employee would get the full company match with no action required. On the other hand, let’s say that the employee has a contribution each month of $3000 instead of $1500. This participant is actually going to hit the statutory limit, probably six months into the year. At a match of 50% on the first 10% they contributed, the participant will receive less match than if he spread his contributions out over the year. A true-up contribution allows the employer to contribute the difference into his account.”

In another scenario, an employee may defer less than the match rate for the first half of a year, and then defer well above the rate for the last six months. In that scenario, Murphy says, employers will average out the match, and apply the difference for the participants.

The contribution is generally completed within the first two months following the new year, but will normally hold a deadline of April 1 because of the length in time taken for later contributions to process, says Murphy. This date can vary by an employer however, and be established as long as it is included in the plan document, is supplied to employees and has been approved.

In the event that a plan sponsor was to miss fulfilling the true-up—a scenario Knowling regards as very unlikely due to the visibility surrounding the process—the plan sponsor would work with either a compliance or legal team on a resolution.  Due to its status as an unrequired benefit, Murphy notes plan sponsors would not face a penalty from regulators should a true-up contribution be missed. However, if written into the plan document, the missed benefit must still be corrected.

During the PLANSPONSOR National Conference in June, poll results showed more than half of sponsors surveyed (55%) do not offer a true-up match, whereas 44% did.

According to Knowling, if the plan sponsor is already automatically enrolling employees at the match rate, participants will less likely see—and need—a true-up match.

However, the number of plan sponsors offering true-up matches may increase in the upcoming years ahead, as a recent defined contribution benchmarking survey from Deloitte found 54% of plan sponsors offered a true-up match in their plan design—nearly a 10% jump from 45% in 2015.

For workforces and plans not offering a true-up contribution, Knowling says plan sponsors can employ education targeting communications to participants on track for missing out on maximizing the employer match.