Non-elective contributions are contributions an employer chooses to make to employee 401(k) accounts, even if an employee is not personally contributing to the plan. This differs from employer matching, which requires an employee to defer from their own salary to get the employer contribution. Non-elective contributions can boost all employees' retirement savings and are especially beneficial for those who may not yet be in a position to contribute on their own. Gusto Retirement offers two types: safe harbor non-elective and profit sharing.
Non-elective contributions give employers flexibility. You 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.
Note: Non-elective contributions can be added to a plan mid-year, but it will require a lump sum true-up the following year to make employees whole for the period before the contribution was added.
There are two options for non-elective contributions.
If a plan meets safe harbor guidelines, employers can forgo most compliance testing typically required by the Internal Revenue Service (IRS) for all 401(k) plans. To get these benefits, employers need to follow specific rules:
Contribute at least 3% of each employee's annual compensation, as long as it does not exceed IRS contribution limits
Keep the contribution the same throughout the entire year — any changes will cause the plan to lose safe harbor status
Unlike other non-elective 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 contribution amount at the end of the year. There is no minimum amount.
There are several profit-sharing formulas available, so businesses can choose an option that fits their needs and goals. Vesting schedules can also apply 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.