Recording the employer’s contribution to the 401(k) plan includes the company’s responsibility for the retirement plan and identifying related expenses in the financial records. The entry also shows the payment made to the 401(k) fund when the contribution is deposited.
Steps to Record a 401(k) Employer Contribution
- Recognize the Liability: When the employer promises to contribute to an employee’s 401(k), it becomes a liability until the contribution is paid to the retirement fund.
- Record the Expense: The employer contribution is recorded as an expense since it’s part of employee compensation.
- Pay the Liability: Once the contribution is deposited into the 401(k) plan, the liability is reduced.
1. Recording the Employer’s Contribution Liability
Example: The company commits to a 401(k) contribution of $3,000 for the pay period.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-15-2024 | 401(k) Employer Contribution Expense A/c Debit | 3,000 | |
| 08-15-2024 | To 401(k) Payable (Liability) A/c | 3,000 |
Explanation:
- 401(k) Employer Contribution Expense will debited because the company incurs expense for contributing to employee retirement plans.
- 401(k) Payable will credited to record the company’s liability to the 401(k) fund until the payment is made.
2. Recording the Payment to the 401(k) Fund
Once the contribution is paid to the 401(k) plan, the liability is cleared by recording the payment.
Example: The company transfers $3,000 to the 401(k) fund.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-20-2024 | 401(k) Payable A/c Debit | 3,000 | |
| 08-20-2024 | To Bank A/c | 3,000 |
Explanation:
- 401(k) Payable will debited because the company is now clearing its liability by contributing.
- Bank will credited to account for the outflow of money to the 401(k) plan.
Summary of Entries
- Initial Recognition:
- Debit: 401(k) Employer Contribution Expense
- Credit: 401(k) Payable
- Payment to the 401(k) Fund:
- Debit: 401(k) Payable
- Credit: Bank
These entries ensure that the company correctly records the cost of contributing to employee 401(k) accounts and clears the liability once the payment is made.