What are profit sharing and nonelective contributions?

Profit sharing and nonelective contributions are types of contributions the employer makes even if participants aren’t contributing to the plan.

Profit sharing is a pre-tax contribution employers can make to all employees who are eligible to participate in the plan. With Guideline, profit sharing can be made as an annual contribution at the end of the year or on a per pay period basis as a nonelective contribution at a rate set by the employer.

See these articles on profit sharing formulas or benefits of profit sharing for more information

Both annual profit sharing and nonelective profit sharing contributions can be subject to vesting schedules. Vesting schedules can help to reward long term employees, and forfeitures of unvested amounts can be used to offset employer costs.

There is also a third option that is known as Safe Harbor Nonelective Contributions. These are employer contributions of at least 3% of each employee’s annual compensation. As with Safe Harbor matching, plans that make nonelective Safe Harbor contributions are not subject to nondiscrimination testing, and these contributions are immediately vested. Feel free to review this article on vesting options for more information. Please note that a plan will need to elect whether they choose to provide a nonelective Safe Harbor contribution for the coming year, prior to December 1st.

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