How to Accrue 401(k) Employer Matches Correctly: Journal Entries and Remittance Timing

The Core Principle: Why Your 401(k) Match is a Liability

Offering a 401(k) match is a standard move for competitive startups to attract and retain talent. But for the person managing the books, often a founder or operations lead, it’s more than just another line item on a payroll report. Each match your company promises is a real financial commitment that needs to be recorded correctly long before the cash leaves your bank account. Getting the accounting wrong can misstate your company’s profitability and liabilities, creating entirely avoidable problems during fundraising diligence or a financial audit. This guide provides a practical playbook for US-based startups on how to record 401k employer match in accounting, ensuring your books are accurate, compliant, and ready for scrutiny. See the Benefits Accounting & Accruals hub for related guides.

To properly handle retirement plan accounting, you must operate on the accrual basis. The core of this method is simple: expenses are recognized when they are incurred, not necessarily when they are paid. According to US GAAP, this is a requirement for accurate financial reporting. As a foundational text states, "Under US Generally Accepted Accounting Principles (US GAAP), expenses must be matched to the period in which they are incurred." An employer's 401(k) match is a form of employee compensation. It is earned by your team member during the pay period they worked, making it an expense of that specific month.

The official guidance reinforces this. Specifically, "Per Accounting Standards Codification (ASC) 715-30, compensation cost for a 401(k) match should be recognized over the employee's requisite service period." This means if an employee works in January, the matching contribution they earned is a January expense, even if you do not remit the cash to the 401(k) provider until February. This process creates a short-term liability on your balance sheet, accurately reflecting that your company owes this money. For any startup seeking investment, this adherence to US GAAP retirement reporting is non-negotiable, as investors expect to see a true picture of your financial obligations.

How to Record 401(k) Employer Match in Accounting: A Monthly Playbook

This process translates the principle of accrual accounting into a practical, repeatable workflow. For a startup using a modern payroll provider like Gusto or Rippling alongside accounting software like QuickBooks, it should be a straightforward monthly closing task. The key is to use the data from your payroll system to create the correct journal entry. This directly addresses the common pain point of calculating and recording the correct monthly employer-match accrual.

The workflow can be broken down into a few simple steps executed at the end of each month.

1. Generate the Payroll Report: Run your payroll report for the period in question (e.g., the month of January). This report will detail the total employer 401(k) matching contribution calculated for all participating employees based on their salary deferrals for that period. This total is the exact number you need for your journal entry.
2. Prepare Your Chart of Accounts: Before you can record the entry, ensure two specific accounts exist in your Chart of Accounts within QuickBooks. If they do not, you will need to create them.
   • Expense Account: An account like "Compensation: 401(k) Employer Match" under your main Payroll Expenses category. This captures the cost on your income statement.
   • Liability Account: An account like "Accrued Expenses: 401(k) Contribution Payable" under Current Liabilities. This tracks the amount you owe on your balance sheet.
3. Create the Journal Entry: With the report total and your accounts ready, you can now record the accrual. A complete walkthrough involves two parts: recording the accrual and then clearing the liability when the cash is paid.

Example Part 1: Recording the Accrual

Consider a SaaS startup that just processed its January payroll. The payroll summary report shows a total employer 401(k) match of $5,000. To recognize this expense in January, the journal entry in QuickBooks is:

• Debit (Increase Expense): Compensation: 401(k) Employer Match - $5,000
• Credit (Increase Liability): Accrued Expenses: 401(k) Contribution Payable - $5,000

This entry correctly places the $5,000 expense on the January income statement and establishes the corresponding liability on the balance sheet, reflecting the company's obligation.

Example Part 2: Clearing the Liability When Paid

On February 5th, the company wires the $5,000 to its 401(k) plan administrator. The journal entry to record this cash movement is:

• Debit (Decrease Liability): Accrued Expenses: 401(k) Contribution Payable - $5,000
• Credit (Decrease Cash): Bank Account - $5,000

Notice the expense account is not touched in February. The cost was already recognized in the period it was incurred, which is the essence of accrual accounting. A scenario we repeatedly see is confusion over the role of a PEO. While a PEO executes payroll transactions and remits taxes, your company remains responsible for ensuring its internal financial statements in QuickBooks are accurate under US GAAP. The PEO report is simply an input to your accounting, not the final record itself.

Remittance Timing and Deadlines for Startup Retirement Compliance

After accruing the liability, the next critical question is: when do we actually have to deposit the cash? Timely funding is crucial for avoiding penalties, maintaining plan qualification, and keeping employee trust. The regulatory guidance provides both a primary rule and a practical safe harbor that most startups should follow.

The main rule is governed by the Department of Labor (DOL). The DOL states, "The Department of Labor (DOL) requires that employee and employer contributions be remitted to the plan 'as soon as administratively feasible.'" This language can feel ambiguous, but for small businesses, a clearer guideline exists to provide certainty. "For retirement plans with fewer than 100 participants, a 'safe harbor' deadline exists: contributions are considered timely if deposited within 7 business days of payroll." For nearly all early-stage startups, this 7-business-day window should be treated as the operational deadline for both employee deferrals and employer matching contributions.

Missing this deadline can attract DOL scrutiny and potential penalties. However, there is a distinction between this operational remittance timing and the absolute final deadline for tax purposes. According to tax regulations, "The absolute final deadline to deposit an employer match for a given tax year is the company's tax filing deadline for that year, including any extensions." This provides some flexibility. For example, a cash-constrained deeptech startup could, in theory, accrue its match expense monthly throughout the year but fund the entire amount in a single lump sum the following March before filing its taxes. While this is permissible for tax deductibility, it is not best practice. It can create employee relations issues and complicates reconciliations. Adhering to the 7-day safe harbor is the recommended approach for maintaining clean operations and good startup retirement compliance.

Using Forfeitures Correctly Under 401(k) Forfeiture Rules

Startups often see employee turnover, which raises an important question: what happens to the match money contributed for an employee who leaves before they are fully vested? This money does not simply disappear or get returned to the company's bank account. Instead, it becomes a plan asset known as a forfeiture. Accurately tracking and using these funds is essential to prevent misstating expenses and liabilities.

When an employee with unvested funds terminates employment, those funds are moved into a separate forfeiture account within the 401(k) plan. As plan documents outline, "Forfeitures (unvested employer contributions from terminated employees) are held in a separate account within the 401(k) plan and can typically be used to pay for plan administrative expenses or to offset future employer matching contributions." The key distinction here is that these funds are a plan asset, not company cash. This is a common point of confusion. Because the money is held by the plan trust under ERISA rules, you cannot simply withdraw it.

When you use these forfeiture funds, it reduces the amount of cash you need to send to the plan, but it does not reduce your compensation expense for the period at the time of the initial accrual. For instance, an e-commerce company calculates a $12,000 employer match for the quarter and makes the corresponding accrual. They check with their 401(k) provider and find they have $3,000 available in their forfeiture account. They can instruct the provider to use the $3,000 and then remit only $9,000 in cash. The journal entry to record the payment would be:

• Debit (Decrease Liability): Accrued Expenses: 401(k) Contribution Payable - $12,000
• Credit (Decrease Cash): Bank Account - $9,000
• Credit (Decrease Expense): Compensation: 401(k) Employer Match - $3,000

This entry clears the full liability, shows the actual cash that left the bank, and correctly reduces the net expense for the period by the amount of the forfeiture used. Following 401k forfeiture rules is critical for accurate financial reporting during an audit or diligence.

A Checklist for Strong 401(k) Accounting Hygiene

Managing your 401(k) match accounting does not have to be complex. For founders and operators at US-based startups, establishing a solid process early prevents larger issues down the road. Here are the most important takeaways to implement.

• Systematize Your Accrual: At the end of each month, make it a standard closing procedure to pull your payroll report and post the journal entry for your 401(k) match. This ensures your expenses are always matched to the correct period.
• Set Remittance Reminders: Add a recurring task to your calendar for 3-4 business days after each payroll run to initiate the 401(k) funding. This keeps you well within the 7-business-day safe harbor and avoids compliance issues.
• Manage Your Forfeitures: On a quarterly or annual basis, request a statement of your plan's forfeiture account balance. Create a plan with your provider to use these funds to offset future contributions, preserving your company's cash.
• Clarify Roles with Your PEO: If you use a PEO, understand that while they handle payroll execution and tax remittances, you are ultimately responsible for the accuracy of your company’s financial statements in QuickBooks. The PEO report is an input to your accounting, not the final record itself.

Properly managing payroll accruals for benefits is a sign of strong financial hygiene. It demonstrates to investors, auditors, and your team that you have robust controls and a clear understanding of your company's financial obligations. Getting this right builds a foundation for scalable and trustworthy financial operations. Explore more at the Benefits Accounting & Accruals hub.

Frequently Asked Questions

Q: Can we just record the 401(k) match expense when we pay it in the following month?
A: No, this would violate US GAAP. The expense must be recorded in the period the employee earns it, not when the cash is paid. Recording it upon payment would misstate your expenses and liabilities for both months, which can be a significant issue during a financial audit or fundraising diligence process.

Q: What are the consequences of missing the 7-day safe harbor deadline for deposits?
A: Missing the 7-day safe harbor can result in penalties from the Department of Labor, including excise taxes. It may also require filing a Form 5330 to report the late deposit and could be flagged as an operational error that requires correction, creating administrative work and potential legal risk.

Q: Our PEO provides detailed reports. Isn't that enough for our accounting records?
A: While PEO reports are a critical data source, they are not a substitute for your own accounting. Your company is responsible for maintaining its general ledger in a system like QuickBooks. You must use the PEO report data to create your own journal entries that correctly classify expenses and liabilities according to your chart of accounts.

Q: Do 401(k) forfeitures expire if we do not use them?
A: Forfeiture rules are dictated by your specific plan document. Most plans require that forfeitures be used within a certain timeframe, often by the end of the following plan year. If unused, they may need to be allocated to eligible participants. It is important to regularly review your forfeiture balance and plan document to avoid losing them.