Pension? Do Employers Match?

by Confused
(Bonnyville, AB)

I know this may seem like a stupid question but if money is deducted every pay period from employees' pay cheques ... then doesn't the employer just pass on those funds deducted to, let's say for example .... Manulife?

Shouldn't it go directly from the employees' cheques to a pension payable account, then paid by cheque to Manulife?

I just started a bookkeeping position. The pension payable accounts and the pension expense accounts are not making sense.

Can someone tell me the basic entries for these transactions regarding receiving from employee then the transaction regarding the payment. Thanks and by the way this is over and above the usual CPP payments.

Pension plan bookkeeping / accounting is a complex area.

There are a lot of different workplace pension plan options out there. Two I can think of right off the top of my head are defined benefit and money purchase plans.

Pooled pensions plans are the newest product directed at the self-employed and those who work in small businesses with no pension plan.

Whether an employer matches employee contributions in plans such as a money purchase plan depends on the plan in place. Money purchase plans, also referred to as defined contribution plans, have become more popular in recent years because the risk shifts to the employee not the employer. Either or both the employee and employer may contribute ... and not necessarily equally.

Defined benefit plans are not as popular as they once were as the employer bears all the risk for market conditions that affect pension asset valuation that affects funding requirements. This type of plan is based on predetermined contributions by the employee (usually but doesn't have to be) but funded by the employer based on benefits to be paid out. Employees are guaranteed a pension based on a formula of earnings, years of service and age usually ... not how much the employee contributed.

You mentioned the payable and expense accounts for the pension plan don't make sense but you didn't tell us what they were so ...

... you need to get a hold of an employee benefits handbook and determine what type of plan you are dealing with.

In addition, it may be helpful to go back to a prior month and trace the journal entries through ... list all the pension plan related entries on one page so you can see how it flows.

Once you've done that, if there is something you don't understand, please post back here using the comments links.

I'm going to give you an oversimplified overview of the entries required from both sides - the employer and the employee. This is just my understanding of how it works ...


Employer Pension Plan Journal Entries

Essentially there are 2 basic entries for the employer.

Debit prepaid/accrued pension cost on the balance sheet and credit cash in bank on the balance sheet to record the contributions; and

Debit pension expense on the income statement and credit prepaid/accrued pension cost on the balance sheet to record the pension expense. I believe this entry is only done annually.

I found a University of Mississipi PDF document on accounting for pensions and post-retirement benefits at olemiss.edu> courses> accy304> chp21_S00.pdf that may be of interest to you.

Accounting-financial-tax.com also has a good 2009 article on "Accounting for Pensions".

Employee Pension Plan Bookkeeping Entries

Generally, you debit wage expense and credit employee pension contribution payable when processing the pay cheque.

When paying the third party holding the funds in trust, you would debit employee pension contribution payable and credit cash in bank.








P.S. I would like to remind you there is a difference between information and advice. The general information provided in this post or on my site should not be construed as advice. You should not act or rely on this information without engaging professional advice specific to your situation prior to using this site content for any reason whatsoever.