This means that if you contribute 6 percent of a paycheck and your company matches 6 percent, then you’ll get all the match coming to you. However, there are plenty of sensible reasons that you might be contributing less for a portion of the year, including that:
- You didn’t even start with the company until part-way through the year
- You left the company before the year ended
- You’re like me and you front-load a year’s worth of retirement contributions into the first few months of the year because you like the extra time for growth, the flexibility, and the psychological boost
In any of these cases, when your 401(k) contributions stop, your company’s match stops as well, and you’d be effectively losing free money.
A true-up solves this problem
There are some companies that add what’s called a true-up feature to their 401(k) plan to help you get all of the potential matching out there.
A true-up entails looking back at the end of the year at all of the 401(k) contributions you and at all of the matching contributions they made, then making sure the percentages are equal — up to their allowable limit. In other words, rather than matching on a per-pay period basis, these companies match on a per-year basis.
As an example, suppose your company matches up to 6 percent per paycheck and that your contributions throughout the year were as follows:
- For the first six months of the year, you contributed 12 percent of your salary to your 401(k) and
- For the last six months of the year, you stopped contributing altogether.
In each of those first six months, your company would have matched 6 percent of your income, but wouldn’t have contributed anything during the last six months.
If your company offered 401(k) true-up matching, they would look back at the end of the year and realize that you had contributed a total of 6 percent of your salary, but that they had made matching contributions equal to only 3 percent of your salary. They would then make that additional matching contribution of 3 percent to your account.
It’s a very valuable feature, but companies aren’t required to include it. That said, I definitely didn’t know my company offered it until I asked HR, so there’s no harm in inquiring.