How do should I optimize my 401k employee contribution to maximize my employer's contribution?

Question

I just want to maximize my employer's contribution. My current employer plan has the following constraints

Company will provide a 100% (dollar-for- dollar) match on the first 5% of eligible W-2

Compensation you contribute on a before-tax 401(k), after-tax Roth 401(k) or after-tax non-Roth basis each pay period, up to the IRS compensation limit. Once your compensation reaches this limit, the company match must end.

Note: The company match is contributed each pay period. In order to receive the maximum company match, you need to contribute a minimum of 5% of compensation on a before-tax 401(k), after-tax Roth 401(k) or after-tax non-Roth basis each pay period.

Suppose I make 100k salary. That means at most the company will contribute 5k

The HR department mentioned it was better to spread my 401k contribution rather than doing a lump sum. I am really confused why that would be the case, when specifically it says 100% match.

Why is it true if I contribute lump sum $5k, it will not be optimized? Am I missing something here?

Answer 1

That also confused me a lot when I started working in the US. Turns out that by "match on the first 5% of eligible W-2", many (all?) employers mean 5% of your earned W2 so far, not the entire yearly W2.

Let's assume that you get paid every week with 2kUSD. Many (all?) companies will match only 5% of it, ie 100 USD. However, if you contribute more than 100 USD per paycheck to your 401k, then some (but not all) employers will catch up on the missing match at the end of the year, as year-end true-up contributions, to ensure they do 100% (dollar-for- dollar) match on the first 5% of eligible yearly 100kUSD W-2.

Therefore, when "The HR department mentioned it was better to spread my 401k contribution rather than doing a lump sum", ask them if they do end of year true-up contributions, and if so, why they make such a claim.

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FYI:

• Can a year-end true-up employer match exceed the 401(k) maximum contribution, in which case the employee would past of their 401(k) contributions?
• Is there any downside for an employer to place excess true-up contributions above the 401(k) contribution limit in a non qualified account?
• Does a 401(k) year-end true-up employer match received in year X+1 for year X count toward the 401(k) max contributions for year X or year X + 1?
• Is a year-end true-up employer match supposed to be received the next year?