What does "true up transfer" mean ?

[Moe Howard]

Has anyone heard the phrase "true up transfer" ? I think it has something to do with the improper allocation of a profit sharing plan contribution .... too much is allocated to one participant's account & too little is allocated to another participant's account. As a result, funds have to be transferred from one account to another... (just my guess).

Can anyone shed some light on what "true up transer" might mean ?

[bzorc]

The term "true-up" transfer refers, in my opinion, to a plan that is still valued on a balance forward basis. Often times a recordkeeper will tell a plan to invest the employees 401(k), matching, or profit sharing based on estimated percentages. After the valuation is complete and the actual contribution splits are known, then a "true-up transfer" is transmitted to put the contributions into the correct fund. A plan that is daily valued should never have a "true-up transfer".

Hopefully an employer contribution is not allocated incorrectly to participants. That opens up a different can of worms...

Hope this helps.

[Guest John Sample]

We do "true-up" transfers on our balanced forward plans, here is why:

The plan allows for investment transfers quarterly.

We process employee transfer requests on the first day of the quarter, based on their prior account balance plus or minus any activity for the quarter (deferrals, match, withdrawals). The plan's trustee then makes the transfers to the assets. Once we receive the trustee statements (around the middle of the month) we reconcile and allocate the investment earnings or loss and then we adjust the original transfer to "true-up" the numbers. The Trustee makes a subsequent transfer of assets.

Very common for balanced forward plans.

As stated earlier it should have nothing to do with the misallocation of any contribution.

[Erik Read]

Another example of "true-ups" is for a company that contributes matching or Profit Sharing with each payroll, at the end of the year, the %'s can be off, and need to be "trued".

[MR]

I agree with John Sample. We follow the same procedure with our balance forward plans and refer to the subsequent transfers as "true-ups".

[actuarysmith]

I agree with ERead. Sometimes employers will try to fund-as-you go during the year on a profit sharing plan. Regardless of whether it is daily val or balance forward, there are usually year-end adjustments to be made.

They are normally the result of an employer not understanding or performing the calculations correctly. For example, the plan may use compensation from the first day of the plan year and the client uses compensation from entry.

Another example is an employer trying to use a modified definition of compensation, such as excluding bonus or overtime when the plan defines the use of gross comp. Although this can be done, it is usually difficult due to discrim issues.

Another example is when a plan has a year-end employment requirement, or when the plan is integrated with social security (or even cross-tested).

Finally, another example is when a plan is top-heavy and the employer gives 3% of pay using the plan definition, rather than the statutory definition of comp.

In all of these cases, a year-end true up is required by the employer. Sometimes it will mean shifting funds from one participants account to another account. In other cases it will mean the employer must deposit additional contributions to the plan.