Employers allocate, on average, $1,929.60 per employee each month for benefits, based on a 40-hour work week. This is a significant investment, so each dollar spent must bring real value to your team. A tried and true way to achieve this is through a non-elective contribution plan.

Through this route, you can directly invest in your employees’ future. You’ll provide for their retirement in a way they’ll understand and appreciate. Imagine their loyalty, knowing their employer is committed to their long-term well-being.

And here’s a bonus. Not only does it enhance your employee benefits package, but it can also provide some advantages in taxation. Keep reading to explore why you should consider implementing this type of plan.

What Is a Non-Elective Contribution?

Most working Americans are aware of the idea of a 401(k) plan. It’s a powerful tool for building retirement savings. Non-elective contributions are a part of that.

These are contributions that employers can make to a 401(k) plan. The employer puts money in no matter what the employee contributes.

This is different from 401k matching. For 401(k) matching, employers add to an employee’s account based on what they put in.

Why Non-Elective Contributions Matter

Envisioning your path to early retirement can seem daunting, especially when considering the projected future costs of living. An employer’s financial support, provided through non-elective contributions, serves as a significant aid toward this goal.

Non-elective contributions function somewhat similarly to a bonus; but, instead of spending it in the present, this “bonus” enters your 401(k) retirement plan. Over time, as these funds stay invested, they can increase in value due to the effects of compound interest.

Benefits of Non-Elective Contributions

The most significant advantage of non-elective contributions is that they’re tax-deductible. The tax break could offset costs, creating a win-win for owners and employees.

Inclusivity

Non-elective contributions ensure all employees benefit without any bias towards top earners. It makes each employee feel included. This promotes a positive work environment and encourages more staff to take part in the retirement plan.

Attracting Talent

In a competitive job market, a robust benefits package could be the difference between securing great talent and losing them to a competitor. Offering non-elective contributions shows potential candidates that your company invests in its employees’ futures.

A Motivating Factor

With non-elective contributions, you’re also giving employees a strong reason to contribute to their 401(k) plans. This type of contribution can motivate your staff to think about their retirement savings and make better financial choices.

Disadvantages of Non-Elective Contributions 

As an employer, you should keep in mind that implementing non-elective contributions results in extra administrative costs. It requires managing default accounts for employees and deciding on suitable retirement plans.

Greater Liability

Setting up non-elective contributions can increase your fiduciary liability. This might include enrolling employees into retirement plans, managing administrative errors, and interpreting plan benefits.

A Brief Intro to Safe Harbor

Safe Harbor 401(k) plans to give employers like you an easy bypass for annual IRS testing. These tests check if the 401(k) plans you offer are unfairly benefiting high earners. Safe Harbor plans require you to make annual contributions to your employees’ plans, though, so it’s not a free pass.

Non-Elective Contributions and Safe Harbor

By contributing a fixed percentage of each eligible employee’s compensation to their 401k, you’re meeting your Safe Harbor obligations. The minimum contribution for Safe Harbor status is three percent.

The Perks of Safe Harbor and Non-Elective Contributions

Non-elective contributions offer a steady and predictable annual cost, unlike matching contributions that can vary from year to year. This consistency helps in budgeting and planning.

The Considerations of Safe Harbor

If you weren’t already planning to make contributions to your employee’s 401(k) plans, then the added cost of the Safe Harbor plan could be a barrier.

Besides, while bypassing some IRS tests is a great benefit of Safe Harbor, you might still need to clear other inspections. Namely, the top-heavy test will still be a consideration. This particular test ensures that high-earning workers hold less than 60% of the total plan balance.

Before Implementing an NEC Plan

Employers should conduct a legal and compliance review before implementing an NEC Plan. This should include understanding any required reporting on forms like Form 1099-NEC.

Ensure that such a plan aligns with your company’s financial situation and objectives. Consider your ability to guarantee non-elective contributions, as consistency is essential once the plan is established.

Other Ways to Contribute to a Retirement Fund

Profit-sharing is a common form of employer contribution. As the name implies, it involves distributing a portion of your company’s profits among employees.

This share goes into their retirement accounts. The amount contributed can fluctuate based on the company’s annual profit.

Defined Benefit Plan

Under a defined benefit plan, also known as a traditional pension plan, employer contributions are calculated based on a set formula. This formula typically takes into account the employee’s salary, years of service, and age.

It’s not dependent on the profit or the performance of the investment. It promises a specific monthly benefit at retirement.

Employee Stock Ownership Plans (ESOPs)

An ESOP allows employees to become company shareholders. ESOPs can be part of an employee’s retirement benefit, where shares of the company are allocated to employees’ retirement accounts. The total shares are based on salary or tenure.

Simplified Employee Pension (SEP) Plans

Under the SEP plan, you contribute to individual IRA accounts of employees rather than to a trust. This plan simplifies the contribution process. It provides flexibility for employers who may not be able to contribute the same amount every year.

Benefits That Improve Employee Retention

Managing your employee benefits through a non-elective contribution plan brings monetary and emotional value to your team. The initial investment yields benefits to you too, including tax advantages and enhanced employee loyalty. However, be mindful of additional administration and compliance fees.

Now that you’re informed, consider how to make your employee’s retirement future brighter. Explore our blog for additional advice and lifestyle tips for your team. A secure future starts with informed choices today.