Nonelective Contribution

Nonelective Contribution

What is a non-selective contribution?

Non-selective contributions are funds that employers choose to direct to employer-sponsored pension plans of their eligible workers, regardless of whether employees make their own contributions. These contributions come directly from the employer and are not deducted from employees’ wages.

This distinction separates a non-selective contribution from a matching contribution, which an employer pays according to the amount of money deducted from an employee’s salary and allocated to his employer-sponsored pension plan.

Key points to remember

  • Non-selective contributions are contributions that an employer makes to an employee’s pension plan, regardless of the employee’s contribution.
  • These types of contributions can benefit employees as they are able to maximize their contribution limits beyond what they could do on their own.
  • Non-selective contributions are issued at the discretion of the employer and may change at any time.
  • Contributions of this type can get an “IRS” employer from “refuge” protections.

Explanation of the non-selective contribution

Non-selective contributions may vary. For example, a business may choose to contribute 30% of each employee’s salary to their employer-sponsored retirement plan. This means that the employer would pay 30 cents for every dollar an employee earns in his individual account.

$ 57,000

The maximum contribution limit mandated by the IRS from all sources.

Employers are free to change these rates as they see fit for their organization. However, non-selective contributions cannot exceed the annual contribution limits set by the IRS.

Benefits of making non-selective contributions

Non-selective contributions are tax deductible and may encourage more employees to participate in the company’s retirement plan. The decision to offer fully earned ineligible contributions can also provide pension plans with Safe Harbor protection, which exempts plans from government-mandated non-discrimination tests.

The IRS administers these tests to ensure that the plans are designed to benefit all employees instead of favoring the highly paid ones. Non-selective contributions can help employers achieve this goal while staying within government rules.

To be granted refuge by the IRS, ineligible employer contributions must be at least 3%. Before the end of the plan year, a company may decide to choose Safe Harbor provisions, such as ineligible contributions for the following year. They can also decide to elect the Safe Harbor provisions for the year 30 to 90 days before the end of this year.

Challenges related to non-selective contributions

Offering non-selective contributions may result in additional administrative costs and this may not be possible for all employers. Making non-selective contributions also means paying money into default funds for employees who do not manually enroll in a plan and select a fund or make contributions. As promoters of trust plans, employers should exercise due diligence in choosing these funds.

To simplify matters, the 2006 Pension Protection Act described the Qualified Default Investment Alternatives (QDIA) and how employers can enroll workers in these funds while enjoying Safe Harbor protection. QDIAs are defined as target date funds (TDF) or life cycle funds, balanced funds and professionally managed accounts.

However, a TDF should not be seen as a final option that would meet the needs of all employees. Employers should always carefully examine their workforce to determine the appropriate diet menu funds and QEDs in order to comply with government regulations and help employees ensure a comfortable retirement.

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