Nonelective contributions are contributions an employer chooses to make to employee 401(k) accounts, even if an employee isn’t personally contributing to the plan. These types of contributions differ from employer matching, which requires an employee to defer from their own salary in order to receive the employer contribution.
Nonelective contributions can provide a boost to all employees’ retirement savings and be especially beneficial to those who may not yet be in a position to contribute on their own. At Guideline, there are two types of nonelective contributions: safe harbor nonelective and profit sharing.
How nonelective contributions work
Nonelective contributions provide employers with quite a bit of flexibility, as they can choose the contribution type and amount each year, depending on business conditions.
Once elected, the contributions must apply to all eligible employees and remain in place for the entire year. While nonelective contributions can be added to a plan mid-year, it will require a lump sum “true up” the following year to make employees whole for the period before the contribution was added.
Types of nonelective contributions
At Guideline, these are the types of nonelective contributions available for plans:
Safe harbor
If a plan meets safe harbor guidelines, employers can forgo most compliance testing that is typically required by the IRS for all 401(k) plans. But to get these benefits, employers must follow specific rules.
For safe harbor nonelective contributions, employers must contribute at least 3% of each employee’s annual compensation, as long as they do not exceed IRS contribution limits. Additionally, the contribution cannot be changed at any point in the year without the plan losing safe harbor status.
Profit sharing
Unlike other nonelective contributions, which must be adopted at the beginning of the plan year and contributed on a per-pay-period basis, profit sharing allows employers to determine the amount of contributions to make at the end of the year, and there is no minimum amount.
There are several profit sharing formulas available, which means businesses can choose an option that fits their needs and goals. Additionally, vesting schedules can be applied to profit sharing, which can help with employee retention.
Learn more about how profit sharing works and the benefits of adding it to a plan here.