401K question

Hi, We have an employee we are paying a "401K contribution" but we don't have a formal plan set up for it. We have essentially set this money aside and it would be paid at a future date. I've inherited the account set up and structure the previous accountant used to set this up, but it looks incorrect although I don't have experience on the 401Ks. We have a Quickbooks and the way this was structured is that a payroll item was set up to set the contribution amount with it hitting an expense account and liability account. Since this is really an accrued expense that we have to pay out, it would make sense to me that this shouldn't hit a regular expense account. The payment would come out of the liability account and then it would offset the expense. Is that right?

Answers

Barrett Peterson Senior Manager, Actg Stnds & Analysis • March 18, 2015

A 401-K requires both a plan, and a separate trust to be a 401-K. This unpaid amount is, effectively a bonus accrual, and should be expenses, as it was. Payment will trigger all payroll taxes, including employer taxes. No 401-K protection exists for the employee in your circumstance.

Lyle Newkirk CFO • March 18, 2015

In addition to Barrett's comments I would worry that by calling it a 401(K) when it is not an accredited plan you could bring liability upon your company for misrepresentation of benefits.

Anonymous Unemployed • March 18, 2015

Thanks for the input, very much appreciated.

Edward Thill VP - Finance & Operations • March 20, 2015

I agree with the cautions stated by Barrett and Lyle, a 401(k) is a very specific and tightly regulated employee benefit. The accounting can be solved simply but is a lesser concern compared to the regulatory requirements of a 401(k) including maintenance of definitive plan documents, segregation of trust assets, non-discrimination testing, validating appropriate investment options, ensuring proper timing of deposits, payroll taxation and Form 5500 reporting, to name just a few. If this benefit is being improperly represented as a 401(k) to your employee, your first step is to ensure that stops.

If there is no employee withholding, you may be instead describing a deferred comp plan and if so, make sure any documentation aligns with such. In that case, the QB set up sounds correct in that you'd record the expense as the amount is earned by the employee and credit the related liability. You would then reduce the liability when payments are made via payroll.

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