Non-Elective contributions and Matching Contributions

What is the difference between non-elective contributions and matching contributions to my employees’ 401k plan? How does either affect me, the employer? Richard E. Simpson, Brooklyn, NY owns a bookstore.

Learning the difference between non-elective contributions and employee match contributions is one of the most important first steps when you have decided to set up a 401k plan for your small business’ employees. These are the two ways in which you, the employer, can choose to make contributions to your employees’ retirement savings plan.

When you decide to contribute a percentage of every employee’s salary to his 401k, you are making a non elective contribution. For example, you may choose to make a non elective contribution of 30%, which means for every dollar from the employee you contribute an additional 30 cents. Remember that non-elective contributions have to be made to an eligible employee’s account even if he does not make any contribution from his side to the 401k.

A matching contribution is a better way to encourage employees to start saving for their future. Here, you contribute as much as your employee does to his 401k account. If your employee defers a specific amount from his salary into the retirement planning account, you match his contribution.

The IRS allows you to make both kinds of contributions simultaneously for your 401k plan too. Of course, you will need to read up on current tax law stipulations before you can determine exactly in what manner and how much to contribute. A traditional 401k plan can also be modified with respect to the amount that you will contribute as an employer. If your business is going through a bad patch you can minimize your contributions, if necessary.

Choosing an IRS compliant 401k suite like is a great advantage if you find it difficult to keep track of the various legal guidelines and regulations. Such a package keeps your 401k plan perfectly aligned with the currently applicable legalities.