Defined Contribution Plan - Discretionary Profit-Sharing Contribution
Recording a year-end discretionary profit-sharing contribution to employees' 401(k) or profit-sharing plan accounts, accrued based on board authorization and recognized as expense in the period earned.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Profit-Sharing Contribution Expense | Expense (+) | 8,500,000.00 | - |
| Accrued Profit-Sharing Contribution Payable | Liability (+) | - | 8,500,000.00 |
💡 Accountant's Note
Discretionary profit-sharing contributions are employer-only contributions not tied to employee deferrals. They are accrued in the period the related earnings are generated and the board has authorized the contribution (ASC 710-10). The contribution amount may be a fixed percentage of compensation or a percentage of profits (hence 'profit-sharing'). Deductible up to 25% of total compensation of all eligible participants (IRC Section 404). Profit-sharing plans can include a 401(k) feature or stand alone. Vesting schedules (cliff or graded) apply to employer contributions in most plans.
Practitioner & Systems Framework
💻 ERP Architecture
Profit-sharing allocations must follow the plan's allocation formula (pro-rata by compensation is most common; integrated with Social Security wage base formulas are complex). Calculate the allocation before year-end to assess IRC Section 415 limits ($69,000 annual additions cap per participant in 2024 — the sum of employee deferrals + employer match + profit-sharing cannot exceed this). Contributions must be deposited by the tax return due date for deductibility in the current year.
⚠️ Audit Flags
Auditors verify board authorization for the discretionary contribution existed as of the accrual date (not just intent). The allocation formula must be consistent with the plan document — discretionary allocations that favor highly compensated employees violate nondiscrimination rules. Top-heavy plan rules (key employees own > 60% of plan assets) require minimum profit-sharing contributions (3% of pay) to non-key employees.
📄 Required Documentation
Board resolution authorizing the contribution amount and date, plan document allocation formula, employee census for allocation calculation, IRC Section 415 limit check by participant, top-heavy determination, accrual calculation, deposit wire transfer record, Form 5500 Schedule H reporting.
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