To Get the Full Employer Match, You May Need to Contribute Evenly All Year Long
Hi Friendos,
If you’re reading this, you’ve probably heard that you should really, really make sure to contribute enough to your 401k (or 403b) to get the full amount of any employer match. Let’s say your employer matches your contributions, dollar for dollar, up to 3% of your compensation. That means that if you make $100k and contribute $3,000 to the 401k (3% of your compensation), your employer will also contribute $3,000. So, when someone says, “Be sure to get the full match” what they mean in this case is, “Be sure to contribute at least $3,000.”
Today in 401k summer school, we get into a much less discussed aspect of employer matching: because employer matching can be implemented in different ways, if your contributions vary during the year, you might not get the full match. It depends on whether your employer will make “true-up” type contributions.
I’ll explain with an example, keeping the assumption of someone making a $100k salary, paid monthly, for gross salary of $8,333/month. Imagine they made a savings plan for the year and will put 15%, $15k, into their 401k.
Scenario #1: They decide to put 15% into their traditional 401k, that’s $1,250/month, and a lot more than the 3% required to get the full employer match. If they contribute evenly throughout the year, they’ll contribute $1,250 and the employer will contribute $250 each month. By year end the employee will contribute $15k (=$1,250 * 12) and the employer will contribute $3k (=$250 * 12).
Scenario #2: Now imagine for whatever reason, this person decided to do all their contributions in the second half of the year. Instead of contributing $1,250/month, they contribute a hefty $2,500 and by end of December they’ve hit their $15k target. Here is how that lines up vs scenario #1:
The employer is matching on a per-paycheck basis, up to 3% of contributed salary within each paycheck. In scenario #2, there are no employee contributions in the first half of the year, so no matching. Employer matching is only half of scenario 1, $1,500 vs $3,000.
If this 401k plan has no true-up contributions, that’s the end of the story and our poor worker has missed out on $1,500 of free money. If the employer has a true-up provision (aka, “annual reconciliation,” “matching adjustment,” “employer match reconciliation,” “retrospective match correction”) then this person will get that additional $1,500 put into their 401k account, probably in the first quarter of the next year.
As of 2022, around 1/3rd of employer 401k plans did NOT offer true-up contributions, and about 2/3rds did. How can you find out for your own plan? Ask your HR, call the financial services company that administers your 401k plan, or look yourself in the document called the “Summary Plan Description” (SPD). This document will be at least dozens of pages long, is very boring, and is required by law to be available for your review. Here’s some example language for a plan that does have true-ups:
Here is an example of a plan without true-ups – the description will not say what is not present (true-ups), but instead discusses matching based on contributions in each pay period, full stop:
That one used to be my own 401k plan!
My advice is to contribute to your retirement plan evenly throughout the year, unless you have a specific reason to do otherwise.
-Stephanie
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