Is Your Aim True?
In accounting, one will “true up” an estimated revenue to equal the actual amount.
In cycling, you true a wheel by adjusting the spokes to make it perfectly circular in relation to the hub – with no “flat spots.”
Some retirement savings plan designs do not provide the same employer financial support if contributions vary throughout the year.1 A true up provision ensures that the company financial support is the same for all who contribute the same amount in a plan year. If your plan doesn’t have a true-up provision, now’s the time to make that change. Market the change as a second chance, an opportunity to obtain the full employer contribution. Don’t forget to provide examples and assistance.
You offer a retirement savings plan.You offer an employer match. You feel bad each year, because some workers miss out and leave money on the table – they failed to receive the full employer matching contribution because your match is calculated payday by payday and:
- Some only made contributions in the first few months of the year,
- Some failed to enroll when first eligible,
- Some only made contributions in the last few months of the year, and
- Others don’t contribute enough to get the full match.
Front Loading Employee Contributions: A retirement savings plan that does not include “true up” might penalize a worker whose contributions are concentrated early in the plan year. Say your plan offers a 50 percent match on the first 6 percent of pay contributed – calculated each payday without any true-up. So, where an employee contributes 12 percent during the first six months of the plan year, and nothing during the last six months of the plan year, she will have contributed 6 percent of pay, but will receive only 1.5 percent of pay in employer matching contributions.
Back Loading Employee Contributions: Same plan design, except here the employee contributes nothing during the first six months of the plan year and 12 percent of pay during the last six months of the plan year. Again, she will have contributed 6 percent of pay, but will receive only 1.5 percent of pay in employer matching contributions.
In 2019, why not give everyone a second chance to ensure that they did not leave money on the table?
Re-examine your plan document — specifically, the employer matching provisions to reconfirm that the match is calculated separately for each payday. Change the match provision to include a “true-up,” which you can calculate based on contributions at any time during the plan year, and announce the change with great fanfare, targeting communications to those who might benefit, coupled with modest, individual employee assistance.
An example: your plan offers a 50 percent match on the first 6 percent of pay contributed. But, how is that calculated? Let’s say Jan has been eligible since January 1st. Jan earns $52,000 a year, paid as $2,000 biweekly. Jan isn’t a participant right now. However, she was thinking about joining the plan in July, 2019. If she contributes 12 percent of pay, or $240 per biweekly pay period for the last 13 paydays in 2019, a total of $3,120 (or 6 percent of her $52,000 of compensation in 2019), what does your plan provide? What will her match be for 2019?
- $780 ($60 a payday for each of the thirteen paydays when she contributed 6 percent or more of her $2,000 biweekly salary), or
- $1,560 (50 percent of the first 6 percent of $52,000 of pay contributed)?
Many plans have adjusted their employer matching contribution plan provisions to calculate the match based on what was contributed during the entire plan year — regardless of the timing. So, those who join the plan mid-year can get as much match as if they spread contributions evenly over each payday. Similarly, those who start slowly but increase their savings rate will also get the same match for the year compared to those who spread contributions evenly over all paydays.
If your plan calculates match based on each payday contribution, you have an opportunity to add value, to prompt greater participation, and greater deferrals, by adding a true-up provision. If you are worried that this would allow individuals to “front-load” their contribution, quit, and get a larger matching contribution, it just isn’t so. In our above example, if the individual contributed $3,120 in the first six paydays and then quit, his employer match would only be $360 (3 percent of $12,000 of covered compensation).
- If your plan already has this provision in place, no problem. All you need is a specific, targeted communication to those who are not on track to contribute enough to get every penny of the employer match.
- If your plan does not have “true up” provisions in place … well, what are you waiting for?
1J. Levine, How Saving Too Much, Too Early In The Year, Can Hurt Your Retirement, Forbes, 2/13/19, Accessed 2/18/19 at: https://www.forbes.com/sites/jeffreylevine/2019/02/13/how-saving-too-much-too-soon-can-hurt-your-retirement/#72b0496c754a