One of the nice benefits of your employer’s retirement savings plan (403b/401k) is that it likely includes a match.  That’s free money your employer contributes, assuming you’re also putting in your money (like 4%).

How you elect (=declare to your custodian) the money you are contributing to your own portion each paycheck depends on what your employer has set up with your custodian (like Fidelity).  You might see that your employer allows you to select a dollar amount to contribute, or maybe an integer percent, or the situation we’re going to focus on – an integer percent up to a certain percentage of your income such as 50%.

An employer that matches on a per-paycheck basis only contributes when you are contributing.  If an employee finishes contributing (or has less than 4% contribution left to contribute in their last paycheck(s) of the year), then the employer has nothing left to match.  This is especially challenging for employees with larger incomes, when the 403b/401k contribution have to be elected in whole-percentage increments.

Some employers, who are willing to go through some extra effort to ensure their employees receive match dollars, will go through a process after the end of the year called a “true up”, which we mentioned last time but left to this post for explanation in detail.  In ~January 2021, they go back to look at all of your 2020 contributions, and if you maxed out your contributions early, they’ll add your extra match component at that time, so you don’t miss out.  If your employer doesn’t have a true-up, and you can convince your Human Resources department that they should add one, that’s a nice little benefit to have.  The one little catch of a true-up is that often like bonuses, you still have to be employed by that employer come January of that next year for this contribution to be added for you.  So if you max out your contributions in January-February 2020, and then leave the company before January 2021, you’ll only get the January-February 2020 portions of your match.

Let’s have an example of what would happen 1) contributing too fast without a true-up, 2) contributing slowly enough across all the paychecks without a true-up, and 3) contributing with a true-up. 

Example 1:

If you, for round numbers sake, were making $100,000, (equally each paycheck, no pay raise) and contributing 50% of your paycheck each pay period.  Then in a typical 26 pay period year, you’d be earning ~$3946/pay period, and contributing ~$1923/pay period of that to your 403b.  Well, if you could do that all year, you’d have put in $50,000.  But your contribution is federally capped at $19,500 (or $26,000, but I’m going to stick with just the $19,500 scenario for now for simplicity).  Therefore during the 11th paycheck you’d contribute less than your full 50%, and you wouldn’t contribute anything for paychecks # 12-26.  Assume you are eligible for a 50% match up to 4% (so 2% contribution).  The employer would therefore contribute their ~$77 for paychecks # 1-11, and nothing for paychecks # 12-26, for a total employer match of ~$846.

Example 2:

Where as if you, our hypothetical employee, was spreading your contributions fully across all 26 paychecks, the full employer match of $2000 would have been received by the employee, ~$77 worth from each of paychecks # 1-26.

Example 3:

If you contributed on the schedule of Example 1, but your employer had a true-up provision, in some ways you’re getting the best of both worlds.  If you, our hypothetical employee, got all your contributions in by paycheck #11, during the course of paychecks #1-11 you’d receive ~$77 per paycheck for paychecks #1-11, and nothing for pyachecks #12-26, so at the end of 2020 you’d have only ~$846 in employer match.  But then come January 2021, you’re still working for this employer, and they go calculate their true-up.  They realize that because of the speed at which you got your money to work in the market, they owe you an additional $2000-846=$1154 in match, and they belatedly add that to your 403b/401k.  You now have a full $2000 in employer match from 2020, and you got your contribution dollars into the market faster.