A common question we get when calculating Employer contributions is what is a true-up? A true-up is anytime a Plan Sponsor might have a contribution (most commonly a match but we’ve seen non-elective, too), that is calculated and deposited throughout the year (usually on a payroll basis) but the Plan Sponsor wants to look at a potential Annual basis instead (the true-up).

First, a Plan Sponsor should consult with their TPA regarding whether or not the Plan Document forces a true-up or not. Next, the TPA can determine the true-up. And last, the Plan Sponsor can decide if they want to fund the true-up (remember, Employer contributions can be deposited as a receivable in the following year as long as it is communicated to the CPA to include in the corporate tax return which could be as late, generally, as 9/15).

A simple example involves one participant in a plan that allows contributions on all compensation and is a Safe Harbor match using the Enhanced formula (e.g., dollar-for-dollar on the first 4% of pay). This participant made $100,000 in gross compensation of which one payroll was $25,000 for a year-end bonus. The participant decided to contribute their full elective deferrals in the one payroll of the $22,500 and received their 4% of pay match on that payroll, $1,000 (=$25,000*.04). However, if the Plan Sponsor decided to true up on an annual basis, their $22,500 in deferrals was still in excess of 4% of pay (=22,500/100,000=22.5% annual deferral rate). As such, a gross match would be $4,000; the net would be $3,000 more to deposit on behalf of this participant.