What Is a Non-Elective Contribution?
An employer contribution to your retirement plan doesn't always require a match. Learn the mechanics behind this funding method and its impact on your savings.
A non-elective contribution is a deposit an employer makes into an employee’s retirement savings plan, regardless of whether the employee contributes their own money. Unlike an employer match, which is contingent on employee deferrals, a non-elective contribution is made at the employer’s discretion. This provides a way for all eligible employees to receive retirement savings support, even those who are not in a financial position to contribute themselves.
Calculating Non-Elective Contributions
The most direct method for calculating non-elective contributions is the uniform percentage, or pro-rata, formula. Under this approach, every eligible employee receives a contribution equivalent to the same percentage of their compensation. For instance, if a company declares a 4% non-elective contribution, an employee earning $70,000 would receive a $2,800 contribution from the employer for that year.
A more complex calculation method is known as permitted disparity, or Social Security integration. This approach allows employers to contribute a higher percentage on employee earnings that exceed the Social Security taxable wage base. The rationale is that the Social Security system provides a higher proportional benefit to lower earners, allowing the plan to compensate by giving a larger contribution to higher earners on income not subject to Social Security taxes.
The formula involves a base contribution percentage applied to all compensation and an excess contribution percentage applied only to earnings above the integration level, which is often the Social Security wage base ($176,100 for 2025). The excess percentage is limited and cannot be more than the base percentage or 5.7%, whichever is less.
Regardless of the formula used, all employer and employee contributions are subject to an overall annual limit set by the IRS for defined contribution plans. For 2025, this limit is $70,000 per employee. This cap includes all sources of contributions—employee deferrals, employer matching funds, and employer non-elective contributions combined.
Employee Eligibility and Vesting
To receive a non-elective contribution, an employee must meet the plan’s eligibility requirements. These criteria often include attaining the age of 21 and completing a year of service, which is frequently defined as working at least 1,000 hours in a 12-month period.
Once a contribution is made, vesting determines the employee’s ownership of the funds. Vesting is the employee’s non-forfeitable right to the employer-provided money in their account. If an employee leaves the company before they are fully vested, they may have to forfeit a portion, or all, of the non-elective contributions they have received.
Two primary vesting schedules are used for these contributions. The first is cliff vesting, where an employee gains 100% ownership of the funds all at once after completing a specific period of service, such as three years. The second is graded vesting, where ownership increases in gradual increments over time. A common graded schedule might grant 20% ownership after two years of service, increasing by 20% each subsequent year until the employee is 100% vested after six years.
An exception to these schedules applies to non-elective contributions made within a Safe Harbor plan design. These specific contributions are required by law to be 100% vested immediately.
Common Uses in Retirement Plans
Non-elective contributions are a foundational component of Safe Harbor 401(k) plans. By committing to a non-elective contribution of at least 3% of compensation for all eligible employees, an employer can automatically satisfy certain annual nondiscrimination tests required by the IRS. This simplifies plan administration and allows highly compensated employees to maximize their own contributions without the risk of failing these tests.
In traditional 401(k) and profit-sharing plans, employers can make discretionary non-elective contributions. Often called profit-sharing contributions, these are discretionary, allowing the employer to decide annually whether to make a contribution and at what percentage, based on business performance or other factors.
These contributions are also a feature of retirement plans for small businesses and self-employed individuals, such as Simplified Employee Pension (SEP) IRAs and SIMPLE IRAs. For SEP IRAs, employer non-elective contributions are the sole funding source. In SIMPLE IRA plans, employers are required to make either a matching contribution or a 2% non-elective contribution for all eligible employees.
Tax Implications for Employers and Employees
From the employer’s perspective, non-elective contributions are a business expense that is tax-deductible for the year in which they are made. This allows the company to lower its taxable income, with the deduction limited to 25% of the total compensation paid to all eligible plan participants.
For employees, the non-elective contributions they receive are not included in their gross income for the year and are not subject to payroll taxes like FICA. The money is deposited into their retirement account on a tax-deferred basis, meaning the funds and any investment earnings can grow over time without being taxed. Income tax is not due until the employee withdraws the money from their account, at which point distributions are taxed as ordinary income.
The SECURE 2.0 Act introduced an option for employers to allow employees to designate non-elective contributions as Roth contributions. This option is only available for employer contributions that are 100% vested when they are made. If an employee makes this choice, the contribution is taxable in the year it is made, but qualified distributions in retirement are tax-free.