The term Year-End True-Up in the 401(k) industry refers to the process of ensuring that employees receive the full employer match to which they are entitled based on their annual contributions. Throughout the year, employers may match employee contributions on a per-pay-period basis. However, if an employee’s contributions vary during the year (e.g., if they contribute more towards the end of the year), they might not receive the maximum possible match.
A year-end true-up reconciles this by comparing the actual contribution percentages to the match formula applied on a per-pay-period basis. If the employee contributed more than the matched amount in some periods and less in others, the employer makes a true-up contribution to provide the employee with the full match they would have received if their contributions had been consistent throughout the year.
This ensures fairness and maximizes the employer’s matching contributions for employees who, for various reasons, did not contribute evenly throughout the year but whose total annual contribution entitles them to a higher match.