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Explanation for year end adjustments to the 401K expense

Apparently each year company A receives a 401K True up invoice base on last years adjustments. Adjustments such as employee percentage contribution change which will affect the percent the company matches. This was never caught in the accrual probably because of how the report is ran from the system. Type a memo explaining why an adjusting journal entry needed to be booked to expense since the True-up invoice was posted to the accrual account. Remember the management your working with is fairly new to the company. The individuals that were responsible for this left the company unexpectedly.

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The rules for the computation of allowable company contributions to a 401k plan are complex and usually require the services of pension specialists. Making adjustments as of year end is very common, and is mostly the result of issues with top-heavy plans. Top-heavy plans are those which tend to favor highly-compensated employees. Without rules to limit contributions on behalf ...

Solution Summary

The solution explains the reasons why year end adjustments are made for the employer contribution to a 401k plan. It involves complex calculations usually performed by pension specialist firms. Code references are provided as well as definition of terms.