At Guideline, we calculate and collect the employer match on a per pay period basis. However, some 401(k) providers do not do this. Instead, they may require an annualized calculation.
Per pay period calculations provide the most consistency for both employers and employees and reduce the risk of large payables at the end of the year. All plans that start the year with Guideline will use a per pay period match and will not need to make additional employer contributions after year’s end. For example, in a plan offering a 100% match on 2% of contributions for an employee with a gross paycheck of $5,000 who defers 2% of that paycheck, or $100, the employer’s matching contribution will also be $100. Since the match amount is calculated on a per pay period basis, employees may receive a different match amount if they change their deferral percentage.
Note that True-Up Contributions may be required for the year that your plan moves to Guideline if your prior 401(k) provider did not calculate and collect matching contributions on a per pay period basis.
For example, consider an employee earning $50,000 per year in a plan offering a 100% match to 4% of compensation. If the employee defers 4% of compensation, or $2,000, over the course of the entire year, then the employer’s matching contribution will also be $2,000 for the year. This is true regardless of the actual contribution each pay period. However, if the employee instead deferred 8% of their compensation in the first 6 months, then stopped deferring for the remainder of the year, at the end of the year, the employer will have contributed only $1,000 in matching contributions. The employer will then need to contribute an additional $1,000, or “true-up”, to complete the full 4% match.