Did you know that maxing your 401(k) too early in the year could reduce your employer match? For high earners whose plan does not include a true-up provision, contribution timing is a detail worth reviewing closely.
Note: The scenario described in this post is a hypothetical example. All numbers and details have been modified for illustrative purposes and do not represent any specific individual's situation.
Image generated with AI assistance from Chat GPT.
The Hypothetical Setup
Consider a high-income earner who, during a financial planning review, mentions they are maxing their 401(k) and receiving the full 4% employer match. On the surface, that sounds accurate — and admirable.
A review of their paystub and W-2 reveals a problem.
In this hypothetical scenario, the individual reaches the IRS annual contribution limit of $23,500 within the first few months of the year — around the 6th paycheck of 26 biweekly pay periods. The employer match, however, is structured on a per-paycheck basis, not as a percentage of annual compensation.
The employer doesn't match 4% of annual salary. The employer matches 4% of each individual paycheck — only while contributions are being made.
Once the annual contribution limit is hit, contributions stop. And when contributions stop, so does the match.
The Numbers: Where the $9,000 Went
Here is what the hypothetical example looks like with the numbers laid out:
| Detail | Value |
|---|---|
| Annual salary | $300,000 |
| Pay frequency | Biweekly (26 periods) |
| Employer match | 4% per paycheck |
| Contribution rate per check | ~34% |
| Pay periods to hit $23,500 limit | 6 of 26 |
| Employer match received | $2,769 |
| Maximum possible employer match | $12,000 |
| Match left unclaimed | $9,231 |
The savings discipline was strong. The contribution strategy needed adjustment.
- Front-loaded approach: $2,769 in employer match — contributions ended after paycheck 6
- Evenly spread approach: $12,000 in employer match — captured at ~7.8% per paycheck across all 26 periods
What Is a 401(k) True-Up Provision?
A true-up provision is an employer-plan feature that reconciles the employer match at the end of the year. If a participant stops contributing mid-year due to hitting the IRS limit, the employer calculates what the full annual match should have been and contributes the shortfall.
Not all employers offer this. Without a true-up, the match is tied to when contributions are actually made. If no contribution occurs during a given pay cycle — whether pay periods happen weekly, biweekly, or even less frequently — there is no match for that period.
Who Is Most Vulnerable to This Gap?
This issue is most likely to affect:
- High earners who set a high deferral rate early in the year and hit the IRS limit well before December
- Employees who join a new employer mid-year having already maxed their 401(k) at a prior employer — they may be unable to contribute at all to the new plan, forfeiting any available match entirely for that year
- Anyone who has not reviewed their plan documents to confirm whether a true-up exists
Strong savings habits are a positive — but contribution timing is a detail worth confirming against the plan's matching structure.
One Approach: Spread Contributions Evenly
If your employer does not offer a true-up provision, one approach worth considering is spreading contributions evenly across all pay periods throughout the year. This is a general illustration — individual circumstances vary, and changes to your contribution strategy should be reviewed in the context of your full financial picture.
In this hypothetical example, that means reducing the per-paycheck contribution rate from approximately 34% to approximately 7.8%. At that rate, contributions continue through all 26 pay periods, the annual limit is reached near the final paycheck of the year, and the employer match is captured on every check.
How This Calculation Works (Illustrative Example)
| Step | Calculation |
|---|---|
| 1. Take the IRS annual contribution limit | $23,500 |
| 2. Divide by your annual gross salary | ÷ $300,000 = 7.83% |
| 3. Set this as your per-paycheck deferral rate | ~7.8% |
| 4. Confirm with your plan documents or HR | Verify no true-up exists |
If your employer does offer a true-up, contribution timing is less consequential — the employer will reconcile the match regardless of when you hit the limit.
The Broader Takeaway
Maxing your 401(k) is a sound savings goal. But maximizing the value of your retirement plan requires understanding not just how much you are contributing, but when and how those contributions interact with your employer's matching formula.
A careful review of compensation structure, pay schedule, and retirement plan documents can surface gaps that are genuinely easy to fix — once you know they exist.
This is the kind of detail that tends to surface during a comprehensive financial planning engagement, not a one-time portfolio review. The mechanics of a retirement plan may seem routine, but for high earners, the dollar impact of overlooked details like this one can be significant and compounding.
This post is for educational purposes only and does not constitute individualized financial, tax, or investment advice. The example presented is hypothetical and uses modified numbers for illustrative purposes only. It does not represent the experience of any specific individual. Retirement plan rules vary by employer — always review your Summary Plan Description and consult with a qualified financial or tax professional before making changes to your contribution strategy. Your Firm Name is a registered investment adviser. Registration does not imply a certain level of skill or training.