True-Ups: What are they and how are they determined?

Employer matching contributions are a great benefit and can help attract and retain employees. It’s not unusual for employers to fund matching contributions each pay period, even though the plan document requires that the matching contribution be calculated on an annualized basis. This means that the matching contribution will need to be calculated both ways (pay period versus annualized) and may result in different matching contribution amounts to certain participants, especially those whose contribution amounts varied throughout the year.

For many employers (and payroll systems), the per-pay-period matching contribution method can be easier to administer and help with company cash flow. Employer matching contributions are calculated based on each employee’s earnings and contributions per pay period. However, this method can create problems for employees who max out their 401(k) contributions early, as we will see below.

Suppose a company matches dollar-for-dollar on the first 4% of pay and pays employees twice a month for a total of 24 pay periods in a year. The per period gross pay of an employee with an annual salary of $120,000, then, is $5,000. If the employee makes a 4% contribution to their 401(k) plan, their $200 per pay period contribution will be matched with $200 from the company.

For the full year, assuming the 401(k) contribution rate remains constant, this employee would contribute a total of $4,800 and receive $4,800 from their employer, for a total of $9,600.

Employees are often encouraged to optimize their 401(k) benefit by contributing the maximum allowable amount to their plan. Suppose instead that this same employee is enthusiastic about this suggestion and, determined to maximize their 401(k) contribution, elects to contribute 25% of their paycheck to the company’s 401(k) plan. Sounds great, right?

At this rate, however, assuming the employee is younger than age 50—and not eligible for catch-up contributions—the employee would reach the $24,500 annual 401(k) contribution limit (2026 annual limit) during the 20th pay period. Their contributions to the plan would stop, but so too would the employer matching contributions, even though the company had only deposited $4,000 into this employee’s account, $800 less than the amount that would have been received if the employee had spread their contributions throughout the year and received the full matching contribution for every pay period.

Employees who max out too soon on their own contributions are at risk of missing out on the full employer matching contribution amount. This can happen if the contribution rate or compensation (due to bonuses, for instance) varies throughout the year. Numbers above reflect 2026 IRS contribution limits.

A note on catch-up contributions: Employees age 50 and older can defer an additional $8,000 in 2026, and those age 60 through 63 can defer $11,250 if the plan permits it—a higher ceiling doesn't fix the problem above, it just moves the pay period in which the employee runs out of room. Starting in 2026, catch-up contributions must be made as Roth for employees whose prior-year FICA wages from the plan sponsor exceeded $150,000; this changes the tax treatment of the employee's deferrals, not the match or the true-up.

When the plan document stipulates that the matching contribution calculation will be made on an annualized basis, plans who match each pay period will be required to make an extra calculation after the end of the plan year. The annualized contribution amount is based on each employee’s contributions and compensation throughout the entire plan year.

The difference between these annualized calculations and those made on a per-pay-period basis will be the “true-up contributions” required for any employees who maxed out their 401(k) contributions early and therefore missed out on the full company matching contribution.

In the example above, the employee would receive a true-up contribution of $800 in the following year.

Plans with the annualized employer matching contribution requirement (per their plan document) may still make matching contributions each pay period, but during compliance testing, which is based on annual compensation, matching amounts are reviewed and true-ups calculated as needed. The true-up contribution is normally completed within the first two months following the plan year end and before the company’s tax filing deadline.

Making true-up contributions means employees won’t have to worry about adjusting their contribution percentages to make sure they don’t max out too early. Employees can front-load their 401(k) contributions and still receive the full matching contribution amount.

Often true-up contributions affect senior managers or business owners; hence companies are reluctant to amend their plan to a per-pay-period matching contribution calculation. That said, employers should be prepared to make true-up contributions and not be surprised when they are required.