What Is a Nonelective Contribution?

Nonelective contributions are funds employers direct toward their eligible workers' employer-sponsored retirement plans whether or not the employees make their own 📖contributions.

Just as with 澳洲幸运5官方开奖结果体彩网:matching contributions, nonelective contributions are not deducted💮 from employees' salaries. However, the amount of a matching contribution depends on how much money the employee contributes. That's not the case with a nonelec✃tive contribution. With a nonelective contribution, the employer contributes to the plan, no matter what the employee contributes.  

Understanding Nonelective Contributions

Nonelective contributions can vary. For example, a company might contribute the equivalent of 3% of each employee's salary toward their employer-sponsored retirement plan. If an employee earns $50,000 per year, for example, the employer would be contributing $1,500 per year, no matter what the employee contributes.

Nonelective contributions cannot exceed the annual contribution limits set by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS). The total annual amount that can be contributed to a 澳洲幸运5官方开奖结果体彩网:defined-contribution plan, such as a 401(k), in 2024 is $69,000 if you're under 50 years old. If you're 50 or older, you can contribute an additional $7,500 in 澳洲幸运5官方开奖结果体彩网:catch-up contributions, bringing the total to $76,500 for 2024.

Advantages of Nonelective Contributions

Advantages for Employers

Nonelective contributions come with advantages for the employer. They are 澳洲幸运5官方开奖结果体彩网:tax-deductible, and they can encourage more employees to participate in the company's retirement plan. The decision to offer 澳洲幸运5官方开奖结果体彩网:fully-vested nonelective contributions can also provide retirement plans with 澳洲幸运5官方开奖结果体彩网:safe harbor protec💧tion, which exempts plans from government-mandated nondiscrimination testing.

The IRS administers these tests to make sure plans are designed to benefit all employees instead of favoring 澳洲幸运5官方开奖结果体彩网:highly compensated ones. Making nonelective contributions ca🧜n help employers meet this goal while also remaining compliant with government rules.

To be granted safe harbor by the IRS, employers' nonelective contributions must be at least 3%. Before the end of the plan year, a company can decide to elect safe harbor provisions like making nonelective contributions for the following year. They can also decide to elect safe harbor provisions for the year generally 30 days before the end of the plan year.

Advantages for Employees

Employers make nonelective contributions to employees' accounts whether or not employees make contributions, which benefits the employees. The employees don't have to do anything to receive this benefit.

Disadvantages of Nonelective Contributions

Disadvantages for Employers

Offering nonelective contributions could come with additional administrative costs, and it may not be feasible for all employers. Making nonelective contributions also means flowing money into default funds for employees who don't manually enroll in a plan and select a fund or make contributions. As fiduciary 澳洲幸运5官方开奖结果体彩网:plan sponsors, employꦰers would need to take due diligenc🐠e in selecting these funds.

To make this simpler, the Pension Protection Act of 2006 outlined its qualified default investment alternatives (QDIAs) and how employers can enroll workers in these funds while gaining safe harbor protection. QDIAs are defined as 澳洲幸运5官方开奖结果体彩网:target-date funds (TDFs) or lifecycle funds, balanced funds, and 🐼professionally managed acc𓃲ounts.

However, a TDF should not be viewed as a definitive option that would meet the needs of all employees. Employers still need to take a thorough look at their workforce to determine appropriate plan menu funds and QDIAꦺs to remain compliant with government regulations and to help employees secure ꧒a comfortable retirement.

Disadvantages for Employees

With a nonelective contribution, an employee may receive les🀅s money from an employer compared to a matching contribution, which varies but can be 5% or more.

The Bottom Line

Employers make nonelective contributions no matter how much employees contribute to the retirement plan. This type of contribution, which must be fully vested, has tax and compliance advantages. However, it's not necessarily right for every employer.