Maxing your 401K Contribution Employer Match

[Wolf359]

I've been fortunate enough to have a salary high enough to maximize my 401-k contributions (limit is $18,000 this year.)
I've also been fortunate enough to have employers who match my contributions.  Typically, they match 50% of my contributions up to 6% of my salary.

HOWEVER, I've noticed a glitch in the system.  All but one of the employers I've had will stop contributing to my 401K when I stop contributing.  That is, they'll put the 3% salary match in per paycheck.  If I hit my contribution limit, and stop contributing, the payroll software assumes I'm not contributing, so they won't apply the match.  That means I get less than 3% of my total salary (because they don't take out 3% all year long.)

It happens automatically, so this is not on purpose.  When I pointed it out, one of the employers actually fixed it in their software.  None of the others could do it on their own (beyond their capabilities.)

The fix is that you have to reduce your contributions so that you hit your contribution limit on the very last paycheck of the year.  As long as you contribute over 6% on every paycheck, then you get matched on every paycheck.

Has anybody else noticed this problem?  It's a really subtle issue -- I usually have to pull out spreadsheets to demonstrate the problem to the accountants. 

Are you leaving money on the table?

[skyrefuge]

Yes, this is a fairly well-known issue among finance nerds, but good for you for noticing it yourself and bringing it up.

The act of the employer giving you the full match is known as a "true-up". As you've discovered, some 401(k) plans have a true-up feature, and some don't, so it's a good idea to know in advance.

https://www.google.com/search?q=401k+true-up

[ZiziPB]

My current employer's matching program works that way.  My prior employer didn't match at all, so I used to front end my contributions.  I didn't realize it the first year after switching jobs so I ended up leaving some money on the table.   Have not repeated my mistake since then ;-)

[Heckler]

Good to know. Thanks. Next year I'll be in that boat.  Still paying too much mortgage to max out RRSP, but only 12 months left!

[Need2Save]

Wolf359,
You have highlighted a VERY important topic with respect to maximizing one's 401k match potential.  I happen to be a Benefits Manager.  Every 401k Plan establishes it's own rules on not only how much they will match (if at all) but also the timing of these matching contributions.  Matching biweekly (or per pay period whatever that frequency is) is very common.  Performing a 'true-up' as mentioned by skyrefuge is actually not required and not that common either. 

Some companies are moving company match to the end of the year, or following the end of the year to avoid contributing to employees who terminate prior to the last day of the Plan Year.   This hurts you because you don't have the benefit of the contributions earning potential over the course of the year. And if you leave the company, you don't get anything for that last calendar year if they have this policy.   

My advice to anyone actively working is to make sure you understand how your match is calculated and whether your employer does a true-up  or not.  Under Plans without the true-up, you are absolutely correct that you will earn the most company match by 'stretching' your contributions throughout the entire year if possible.  This means all 26 pay periods if you are paid biweekly.  Keep in mind the IRS also sets annual compensation limits. For 2015 it's $265,000. If you make over this amount, your employer cannot match earnings above this anyway.  Therefore, you are likely best situated to set your contributions at the lowest amount possible to get the full match at the beginning of the year and leaving it alone. 

Another common pitfall is not knowing if any bonuses you may enjoy are included as 401k-eligible income.  This can surprise you if 401k deductions are taken out and you didn't factor that in to your annual contribution planning.  Find out what the case is if there is any potential you may receive a bonus.  Some plans explicitly exclude bonuses. 

From a Benefits Professional, I assure you that your company is not trying to pull a fast one and that most HR teams will happily explain to you the mechanics of how your plan works if you just ask.  If you are reading this and you don't know -- go into your HR office on Monday and get the 411.   While you are in there, ask about the 'vesting' schedule.  None of the above means anything if you leave the company before you are vested.  This is the magic date you get to keep the company match portion of your account.  You'd end up walking away from all or a portion of it if you are not fully vested.

[Grande]

I have heard of this but have not been 'shorted' the match because I contributed to the max prior to last paycheck. I was sure I spread of the limit across all 26 checks/year. I was considering asking payroll about it but thought I would just make a hassle for them and embarrass myself.

[ninjaneer]

Front-end loading your 401k contributions is helpful for increasing the time it can grow, but if your employer doesn't "true up" you should make a contribution every pay period to get the complete match.  It seems then, that you should only stretch out the minimum to get the match and front load the rest, as long as you are allowed to make 401k changes in the middle of the year.

For example, employer matches 50% on the first 6% you contribute but won't true up.  You make $120k ($10k/mo) and want to front end load, but don't want to leave any money on the table.  You should contribute $600 minimum every month to get the $300 per  month match.  That accounts for $600*12 = $7200 of your max contribution.  You should spread out the other $18k-$7.2k = $10.8k over the first months for as much as you can afford, say $5.4k per month for the first two months.

Your contributions would look like this:
Jan and Feb- You contribute $5.4k, employer contributes $300
At the end of Feb you reduce your contribution
March through Dec - You contribute $600, employer contributes $300

Does this sound right?

[sirdoug007]

Keep in mind the IRS also sets annual compensation limits. For 2015 it's $265,000. If you make over this amount, your employer cannot match earnings above this anyway. 

Wow, I had no idea there was a limit on matching high income employees.  Thanks for the info.  Doesn't apply to me but does to a friend of mine.

Is there anything you can do in this case with a very high income to maximize your match?

[Wolf359]

I have heard of this but have not been 'shorted' the match because I contributed to the max prior to last paycheck. I was sure I spread of the limit across all 26 checks/year. I was considering asking payroll about it but thought I would just make a hassle for them and embarrass myself.

Mostly when I asked payroll, they didn't get it.  No hassle, because they don't think there's any issues. (That's when the spreadsheets come out.) I can solve it for myself just fine.  If I fix it for my company, then all my co-workers are automatically fixed.

My current company came up with the easiest fix of all.  They just let you opt for a fixed dollar amount instead of a percentage.  That way you just divide the number of paychecks into this year's limit, and that's it.  I don't have to change my contribution level if I get a raise.  I only have to change it when the IRS increases the limit.

[xenon5]

I have heard of this but have not been 'shorted' the match because I contributed to the max prior to last paycheck. I was sure I spread of the limit across all 26 checks/year. I was considering asking payroll about it but thought I would just make a hassle for them and embarrass myself.

Mostly when I asked payroll, they didn't get it.  No hassle, because they don't think there's any issues. (That's when the spreadsheets come out.) I can solve it for myself just fine.  If I fix it for my company, then all my co-workers are automatically fixed.

My current company came up with the easiest fix of all.  They just let you opt for a fixed dollar amount instead of a percentage.  That way you just divide the number of paychecks into this year's limit, and that's it.  I don't have to change my contribution level if I get a raise.  I only have to change it when the IRS increases the limit.

That's a great fix.  I wish my company would do that.  I get unpredictable overtime and bonus pay that counts towards 401k contributions and I hate having to babysit my contributions all year to make sure I don't miss any match.

[Grande]

I have heard of this but have not been 'shorted' the match because I contributed to the max prior to last paycheck. I was sure I spread of the limit across all 26 checks/year. I was considering asking payroll about it but thought I would just make a hassle for them and embarrass myself.

Mostly when I asked payroll, they didn't get it.  No hassle, because they don't think there's any issues. (That's when the spreadsheets come out.) I can solve it for myself just fine.  If I fix it for my company, then all my co-workers are automatically fixed.

My current company came up with the easiest fix of all.  They just let you opt for a fixed dollar amount instead of a percentage.  That way you just divide the number of paychecks into this year's limit, and that's it.  I don't have to change my contribution level if I get a raise.  I only have to change it when the IRS increases the limit.

That's a great fix.  I wish my company would do that.  I get unpredictable overtime and bonus pay that counts towards 401k contributions and I hate having to babysit my contributions all year to make sure I don't miss any match.

That's what I do. I can change the contribution at 401k company's website my employer uses. The nice thing is you can elect a dollar amount or percentage of pay. As you know the max contribution for 2015 is $18K so I put in just a little over $700 a check. The last check of the year is only a few bucks more than the employer match just in case. And I get a few hundred more in my check for the holidays.

Some folks on this site argue to get 401k annual contribution in asap. Front load it so the funds grow quicker. It makes sense and the math may be there but then again there's the employer match issue as discussed. On the other hand there is risk of market downturn later in the year where asset prices fall and you bought at higher prices and outsmarted yourself. These days I mostly done my savings and am knee deep in family activities and I really dont care.  It may look dumb and lazy to some but the grand scheme it really does not matter.
 

[MikeBear]

Wolf359

I simply can't believe not ONE person here mentioned The Borg... lol. Star Trek has changed our world.

I have to spread my contributions over all 26 checks, to get the maximum match, which is supposedly 7%, but works out to a bit over 9%. I haven't dared ask my employer why it calculates out higher, just in case it's not supposed to.

[MustachianMD]

I had this problem when I worked at the VA. I decreased my contribution to give space for my incentive bonus because when I received those they would also put in a contribution so I was loosing two paychecks worth of contributions (bonus received semi-annually). I had to routinely had to go in at the end of the year and up my contribution to contribute the full amount without having to leave money on the table.

I am much happier now because my current employer automatically adjusts my contribution, they also do this for my HSA so I don't run into any problems with over contributing.

[Wolf359]

Wolf359

I simply can't believe not ONE person here mentioned The Borg... lol. Star Trek has changed our world.

I have to spread my contributions over all 26 checks, to get the maximum match, which is supposedly 7%, but works out to a bit over 9%. I haven't dared ask my employer why it calculates out higher, just in case it's not supposed to.

Look at people's ages.  This is a younger crowd.  The last Star Trek episode (Enterprise) aired 9-10 years ago.  Wolf359 featured in an episode that aired 25 years ago. 

We're fogies.

[ZiziPB]

Wolf359

I simply can't believe not ONE person here mentioned The Borg... lol. Star Trek has changed our world.

I have to spread my contributions over all 26 checks, to get the maximum match, which is supposedly 7%, but works out to a bit over 9%. I haven't dared ask my employer why it calculates out higher, just in case it's not supposed to.

Your employer may be doing what is called "non-elective contributions" in addition to the match.  These are typically made for all employees, irrespective of whether the employee contributes his or her own money.  Making such contribution ensures that the plan meets safe-harbor requirements for non-discrimination.  My employer makes 2% non-elective contributions for all and then we have a 6% match.  So if you contribute at least 6%, you get 8% from the employer.

[FrugalSaver]

I’m trying to make sure i understand this

My employer matches 7.4% dollar for dollar. But to get the .4 you have to co tribute 8%

I contribute 8% and max out in q4. Am I leaving money on the table?

I called the custodian and they said “your employer does a true up”

[MDM]

Am I leaving money on the table?

...they said “your employer does a true up”

Based on that answer, you are not leaving money on the table.

Can you look at last year's contributions to confirm?  If not, check 2019's numbers in early 2020.