Defined Contribution Plan Accounting: ASC 962, Form 5500, and Audits

Defined contribution plan accounting runs on two separate sets of books. The sponsoring employer records a compensation expense for the contributions it owes, accrues any amount not yet transferred to the trust, and tracks tax deductibility on its own return. The plan itself is a distinct reporting entity under FASB Accounting Standards Codification Topic 962, producing financial statements that report net assets available for benefits at fair value and the changes in those net assets during the year. The rules overlap in places, but the obligations, deadlines, and penalties belong to different parties.

What the Sponsoring Employer Records

The employer’s core entry is a compensation expense equal to the matching and non-elective contributions it owes for the period. Under accrual accounting, the expense hits the income statement in the period the employee earns it through services, not when cash moves to the trust. Anything still unpaid at period-end sits on the balance sheet as an accrued liability for contributions payable.

Administrative costs are trickier. Fees the employer pays directly (legal work on the plan document, some recordkeeping charges) run through the employer’s operating expenses. Fees deducted from plan assets never touch the sponsor’s books at all. The DOL layers a further distinction on top: “settlor” expenses, meaning the costs of establishing, amending, or terminating the plan, must always be borne by the employer, while ongoing administrative expenses that are reasonable and necessary for operating the plan may be charged to plan assets.¹ Pushing a settlor expense onto the plan is a fiduciary violation, so the classification is not cosmetic.

When Participant Deferrals Have to Reach the Trust

Salary deferrals become plan assets on the earliest date they can reasonably be segregated from the employer’s general funds. For most employers with modern payroll systems that means within a few business days of each payroll. Plans with fewer than 100 participants get a safe harbor: deposits made within seven business days are automatically timely. The absolute outer boundary for pension plans is the 15th business day of the month following withholding.²

Miss those windows and the delay is treated as a prohibited transaction, because the employer is effectively using plan assets. The excise tax is 15% of the amount involved per year the violation stands, rising to 100% if the employer fails to correct within the taxable period.³ Late deferrals are one of the most common findings in small-plan audits.

Contribution Limits and Tax Deductibility

Several ceilings apply at once. For 2026, IRS Notice 2025-67 sets:

Employee elective deferrals under IRC Section 402(g): $24,500, up from $23,500 in 2025.⁴
Age 50+ catch-up: $8,000, up from $7,500.⁴
Enhanced SECURE 2.0 catch-up for ages 60–63: $11,250, unchanged.⁴
Total annual additions per participant under IRC Section 415(c): $72,000, covering all employer contributions, deferrals, and forfeitures allocated.⁴

On the employer’s return, aggregate deductible contributions to a profit-sharing or 401(k) plan cannot exceed 25% of the compensation paid to all eligible participants for the year.⁵ Contributions above that line are nondeductible and carry a 10% excise tax each year until absorbed by a later year’s deduction limit or returned.⁶ The accrued expense on the sponsor’s books should not include amounts the sponsor already knows will be nondeductible.

Accounting for the Plan Under ASC 962

The plan is its own reporting entity. FASB ASC Topic 962 sets the framework for its financial statements, with the central goal of reporting net assets available for benefits and how those net assets changed over the year.

Investments at Fair Value

All plan investments are reported at fair value under ASC 820, meaning the price to sell in an orderly transaction between market participants at the measurement date. Unrealized gains and losses flow through the Statement of Changes in Net Assets rather than being deferred, so reported net assets track current market value continuously.

Participant Loans

Loans to participants sit on a separate line as “notes receivable from participants.” Under ASC 962-310, they are measured at unpaid principal plus accrued interest, and the fair value disclosures required for other financial instruments do not apply.⁷ The loan program itself has to satisfy IRC Section 72(p) on amounts and repayment terms.⁸

A default triggers a “deemed distribution” for the unpaid balance plus accrued interest. The wrinkle worth remembering: a deemed distribution does not reduce the participant’s account balance the way a regular payout does. The participant owes income tax, reported on Form 1099-R for the year of default, but the plan keeps the loan on its books as long as a legally enforceable obligation to repay remains.⁹ Correction options are lump-sum repayment, reamortization over the original term, or a combination.

Forfeitures

When participants leave before fully vesting, their unvested balances become forfeitures, which must be accounted for separately. IRS rules allow only three uses: paying plan administrative expenses, reducing future employer contributions, or reallocating to remaining participants. Forfeitures generally must be used by the end of the plan year following the year they occur, and the plan document must specify which use applies. From the sponsor’s side, forfeitures applied against employer contributions reduce the compensation expense recognized; the plan records the same event as a reallocation within net assets.

Contributions, Investment Income, and Benefit Payments

Both employee deferrals and employer contributions are recorded as additions to net assets when the plan’s right to receive them is established. Investment income (interest, dividends, realized and unrealized gains) also increases net assets. Benefit payments and administrative expenses paid from plan assets reduce it. Any admin expenses charged to the plan must be reasonable and tied to plan operations to fit the ERISA exemption for service provider compensation.¹⁰

Nondiscrimination Test Failures

Most 401(k) plans must pass annual ADP (deferrals) and ACP (matching) tests to show highly compensated employees are not benefiting disproportionately. A failure creates entries on both sides of the books. The plan has two and a half months after the plan year ends to distribute excess contributions to highly compensated employees, or six months for certain eligible automatic contribution arrangements. Miss the window and the employer owes a 10% excise tax on the excess. Corrective distributions are adjusted for earnings, reported on Form 1099-R for the year distributed, and cannot be rolled over.¹¹

On the plan’s financials the corrective distributions appear as benefit payment deductions in the Statement of Changes. On the sponsor’s books, any excise tax owed becomes an additional expense.

Required Financial Statements and Disclosures

The plan produces two primary statements each year. The Statement of Net Assets Available for Benefits is essentially the plan’s balance sheet at a point in time, listing investments at fair value, receivables including participant loans, and any liabilities. The Statement of Changes in Net Assets Available for Benefits tracks the year’s movement through contributions, investment returns, benefit payments, and expenses.

Notes to the statements have to describe eligibility and vesting provisions, significant accounting policies (particularly investment valuation), the investment policy, any concentration of investments in a single issuer or asset class, and transactions with parties-in-interest such as the sponsor or service providers.

Reconciling GAAP to Form 5500

The plan’s GAAP statements and its Form 5500 often report different numbers because the regulatory form classifies certain items differently. The most common example: under GAAP, amounts owed to participants who have requested distributions but not yet received them are recorded as liabilities, reducing reported net assets. Form 5500 instructions do not treat them that way, so 5500 net assets typically come in higher. DOL rules require the plan to disclose and reconcile any such differences in the notes.

Audit Requirements and Exemptions

Plans with 100 or more participants at the beginning of the plan year must engage an independent qualified public accountant to audit the financial statements. The auditor’s report goes with the annual Form 5500 and must express an opinion on whether the statements are presented fairly in accordance with GAAP.¹²

Small Plan Audit Waiver

Plans with fewer than 100 participants can waive the audit if three conditions hold: at least 95% of plan assets are held by a qualifying financial institution (bank, insurance company, or registered broker-dealer); the plan adds specified disclosures to its Summary Annual Report; and the administrator provides financial institution statements and evidence of the fidelity bond to any participant who asks.¹³ If more than 5% of assets are non-qualifying, the plan can still qualify by obtaining additional bonding equal to the value of those non-qualifying assets.

The 80-to-120 Participant Rule

Plans hovering near the 100-participant line get some breathing room. If participation at the start of the plan year falls between 80 and 120, and the plan filed as a small plan for the prior year, the administrator can elect to continue filing as a small plan. Once the plan elects to file as a large plan under this rule, though, it cannot then claim the small plan audit waiver.¹³

Form 5500 Filing and Penalties

Every ERISA plan files Form 5500 annually. The due date is the last day of the seventh month after the plan year ends, which is July 31 for calendar-year plans.¹⁴ A two-and-a-half-month extension is available by filing Form 5558 before the original deadline, and plans whose employer has filed a federal income tax extension automatically get the same extended deadline for the 5500.¹⁵

Miss the deadline and both agencies pile on. The IRS assesses $250 per day, up to $150,000 per plan year. The DOL can assess up to $2,529 per day with no statutory maximum.¹⁶ The DOL’s Delinquent Filer Voluntary Compliance Program offers reduced penalties for filers who come forward before being contacted, though IRS penalties still apply separately.

Fidelity Bonding

ERISA Section 412 requires every person who handles plan funds to be covered by a fidelity bond. Coverage must equal at least 10% of the plan assets handled during the prior reporting year, with a floor of $1,000 and a ceiling of $500,000. Plans that hold employer securities, and pooled employer plans, face a higher ceiling of $1,000,000.¹⁷ Coverage has to be recalculated at the start of each plan year based on current asset levels. Premiums are modest, but lapsed bonds are a recurring audit finding.

1
U.S. Department of Labor. Guidance on Settlor v. Plan Expenses
2
eCFR. 29 CFR 2510.3-102 – Definition of Plan Assets, Participant Contributions
3
Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions
4
Internal Revenue Service. IRS Notice 2025-67 – Amounts Relating to Retirement Plans and IRAs
5
Office of the Law Revision Counsel. 26 U.S. Code 404 – Deduction for Contributions of an Employer to an Employees Trust
6
Office of the Law Revision Counsel. 26 U.S. Code 4972 – Tax on Nondeductible Contributions to Qualified Employer Plans
7
FASB. Plan Accounting – Defined Contribution Pension Plans (Topic 962)
8
Internal Revenue Service. 401(k) Plan Fix-It Guide – Participant Loans and IRC Section 72(p)
9
Internal Revenue Service. Fixing Common Plan Mistakes – Plan Loan Failures and Deemed Distributions
10
eCFR. 29 CFR 2550.408b-2 – General Statutory Exemption for Services or Office Space
11
Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests
12
eCFR. 29 CFR 2520.103-1 – Contents of the Annual Report
13
U.S. Department of Labor. Frequently Asked Questions on the Small Pension Plan Audit Waiver Regulation
14
Internal Revenue Service. Form 5500 Corner
15
U.S. Department of Labor. Form 5500 Series
16
Internal Revenue Service. 401(k) Plan Fix-It Guide – You Haven’t Filed a Form 5500 This Year
17
Office of the Law Revision Counsel. 29 U.S. Code 1112 – Bonding