How to Record 401k Employer Contributions Journal Entry in Accounting
Learn how to accurately record 401(k) employer contributions in accounting, including key accounts, contribution types, and reconciliation best practices.
Handling 401(k) employer contributions correctly in accounting is necessary for maintaining accurate financial records and ensuring compliance with regulations.1Internal Revenue Service. 401(k) Plan Overview These contributions are a significant employee benefit and an expense for businesses, so proper recording reflects the true cost of compensation.
This article explains how to account for these contributions using journal entries, providing guidance for bookkeeping or payroll accounting personnel.
Key Accounts Used
To track employer 401(k) contributions, specific accounts within your company’s chart of accounts are used. The chart of accounts organizes all financial transactions, categorizing income, expenses, assets, liabilities, and equity.
An expense account reflects the cost incurred by the company for this retirement benefit, typically found under employee benefit expenses. Common names include “Retirement Plan Expense” or “401(k) Contributions Expense.” Recording this expense ensures the Income Statement accurately shows employee compensation costs.
A liability account tracks amounts owed to the 401(k) plan administrator but not yet paid. This liability arises when the expense is recognized (usually during payroll processing) but before cash is transferred. Common names include “401(k) Payable” or “Accrued Benefits Payable.” This account increases when the expense is recorded and decreases upon payment, ensuring obligations are properly tracked on the Balance Sheet.
Types of Contributions
Employers contribute to employee 401(k) plans in several ways, defined within the plan document.2Internal Revenue Service. 401(k) Plan Fix-It Guide – Plan Operations Not Based on Document Terms Understanding these types aids accurate financial reporting.
Matching
Matching contributions are linked to employee participation.3Internal Revenue Service. Matching Contributions Help You Save More for Retirement When an employee defers salary into their 401(k), the employer contributes an additional amount based on a formula in the plan document, such as matching a percentage of the employee’s contribution up to a salary limit.
These contributions incentivize saving, as employees receive employer funds only if they contribute. Matching contributions may be subject to vesting schedules, requiring employees to work for a period to fully own the employer’s portion. Plans can use “safe harbor” matching formulas, which often feature immediate vesting and can exempt the plan from certain annual nondiscrimination tests required by the IRS. Some plans allow discretionary matching, where the employer decides annually whether and how much to match.
Non-elective
Non-elective contributions are made to all eligible employees, regardless of whether they defer their own salary. These are typically calculated as a percentage of each eligible employee’s compensation.
Like matching, these can be subject to vesting unless designated as safe harbor contributions (e.g., a 3% contribution for all eligible employees, fully vested). Using a safe harbor non-elective approach can also relieve the plan from certain annual testing requirements. Non-elective contributions provide a baseline retirement benefit to all eligible workers.
Profit-Sharing
Profit-sharing contributions offer flexibility, allowing employers to contribute to employee accounts, often based on company performance but not strictly required to be tied to profits. These contributions are generally discretionary, with the employer deciding each year whether to contribute and the amount.
The plan document specifies how the total contribution is allocated among eligible employees, commonly using methods like pro-rata (based on relative compensation) or new comparability (allowing different rates for different employee groups, subject to IRS nondiscrimination tests). Profit-sharing contributions are considered non-elective and can be subject to vesting schedules. All contributions (employee deferrals, matching, profit-sharing) are subject to overall annual limits defined under the Internal Revenue Code.
Recording the Journal Entry
Employer 401(k) contributions must be recorded using a journal entry, following accrual accounting principles where expenses are recognized when incurred. These contributions are a form of employee compensation, and the related expense should be recorded in the period employees earn the benefit, typically aligning with the payroll period.
The standard journal entry involves debiting an expense account (e.g., “401(k) Contributions Expense”) and crediting a liability account (e.g., “401(k) Payable”) for the same amount. This increases expenses on the Income Statement and liabilities on the Balance Sheet, reflecting the obligation to remit funds to the plan administrator. This entry is usually made when payroll is processed and the contribution amount is calculated.
This initial entry records the accrual of the expense and liability before cash is transferred. When the payment is made to the plan administrator, a second entry is needed: debit the “401(k) Payable” account (reducing the liability) and credit the “Cash” account (reflecting the cash outflow). This two-step process accurately captures both expense recognition and cash settlement.
Reconciling for Accuracy
Maintaining accurate 401(k) records requires regular reconciliation, comparing internal records with external confirmations. The primary internal record is the “401(k) Payable” liability account in the general ledger, representing expensed but unpaid contributions.
This ledger balance should be compared against detailed payroll reports, which show calculated employer contributions per employee and in total. Discrepancies between payroll calculations and the general ledger may indicate errors needing investigation.
Internal records should also be compared to external statements from the 401(k) plan administrator. These statements confirm the amounts received and deposited. Comparing company payment records (debits to “401(k) Payable,” credits to “Cash”) against administrator reports verifies that payments were received and correctly applied.
Performing reconciliation frequently (monthly or quarterly) helps identify and correct errors promptly. Timely correction is important, as regulations under the Employee Retirement Income Security Act of 1974 (ERISA) require employee deferrals and related contributions to be deposited as soon as reasonably possible after payroll withholding.4U.S. Department of Labor. ERISA Fiduciary Advisor – Timing of Participant Contribution Deposits For plans with fewer than 100 participants, deposits made within seven business days are generally considered compliant.5U.S. Department of Labor. 401(k) Plans For Small Businesses Regular reconciliation helps verify adherence to these timing requirements.
A consistent reconciliation process supports the integrity of financial statements, ensuring liabilities and expenses are accurately reported. This accuracy is reviewed during financial statement audits and Department of Labor plan audits, making robust reconciliation essential for sound financial management.