401(k) Nonelective Contributions Explained: Safe Harbor, Profit Sharing, and QNECs

Employers can contribute to their employees’ 401(k) accounts in two main ways: matching contributions and nonelective contributions. Matching contributions are tied to employee deferrals—employers contribute only when employees do. In contrast, nonelective contributions are made to eligible employees regardless of whether they contribute to the plan themselves.

Understanding nonelective contributions is critical for both employers and employees. For employers, they offer flexible tools to meet plan goals—whether avoiding annual testing, maximizing owner contributions, rewarding employees, or fixing compliance issues. For employees, they can mean guaranteed retirement savings even without personal deferrals.

This guide breaks down the three major types of nonelective contributions—safe harbor, profit sharing, and corrective (QNECs)—and when each may be appropriate.

What Are 401(k) Nonelective Contributions?

Nonelective contributions are employer contributions made to all eligible employees, regardless of whether the employee chooses to contribute to the 401(k) plan.

There are three main types of nonelective contributions:

1. 1. Safe Harbor Nonelective Contributions
   2. Profit Sharing Contributions
   3. Corrective Nonelective Contributions (QNECs)

Each serves a different purpose and comes with specific rules.

Safe Harbor Nonelective Contributions

Safe harbor 401(k) plans automatically pass the ADP/ACP and top heavy nondiscrimination tests, allowing business owners to contribute up to annual IRS limits ($23,500 + $7,500 catch-up for 2025) without risk of refunds or additional contributions.

Employers can make a nonelective contribution to meet safe harbor 401(k) requirements. The contribution must be at least 3% of eligible employee compensation and meet employee eligibility and vesting requirements.

Eligibility requirements for safe harbor nonelective contributions

• • Employers cannot require eligible employees to work a minimum number of hours or be employed on the last day of the year to receive a contribution.
  • Employers can exclude Highly Compensated Employees (HCEs) – but not non-Highly Compensated Employees (non-HCEs) - from contributions.

Vesting requirements for safe harbor nonelective contributions

• • Contributions made to a traditional safe harbor plan must be 100% immediately vested.
  • Contributions made to a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan can be subject up to a 2-year cliff vesting schedule.

Safe harbor nonelective contributions are a predictable and compliance-friendly option for employers who want to avoid annual testing headaches.

Profit Sharing Contributions

Profit sharing is a form of discretionary nonelective contribution. Employers have the flexibility to decide annually whether to make a contribution and how much to contribute. These contributions can be allocated to eligible employees using various formulas to meet specific plan goals

Key features of profit sharing contributions

• • Amount: Discretionary up to annual IRS contribution and deductibility limits.

• • Eligibility: Employers can require employees to work a minimum number of hours or be employed on the last day of the year to receive an allocation.

• • Vesting: Employers may impose a 3-year cliff or 6-year graded vesting schedule on contributions.

Common profit sharing formulas

Employers have multiple formula options when allocating profit sharing contributions to employees. This flexibility allows businesses to customize allocations to meet business objectives. The most common formulas include:

• • Pro Rata: All eligible employees receive the same percentage of compensation. This is the simplest and most equitable method.
  • Permitted Disparity: Allows higher contributions for employees earning above the Social Security wage base. This method coordinates with Social Security benefits to provide more for higher earners.
  • New Comparability (Cross-Testing): Contributions are allocated based on employee groupings (such as job class or ownership status). Often used to provide larger benefits to select groups—typically older or highly compensated employees—while passing nondiscrimination testing.

Company goals to meet with profit sharing

Profit sharing contributions can be advantageous to employers in several scenarios:

• • Maximizing Owner Contributions: For business owners aiming to contribute up to the legal limit ($70,000 for 2025, excluding catch-up contributions), profit sharing can be an effective tool.
  • Providing a Base Benefit: Offering a retirement benefit to all eligible employees, regardless of their own contributions, can help in employee retention and satisfaction.
  • Attracting and Retaining Talent: Generous profit sharing contributions can make a company's benefits package more competitive.
  • Flexibility for Variable Profits: Companies with fluctuating profits can adjust contributions annually based on financial performance.

Corrective Nonelective Contributions (QNECs)

Qualified Nonelective Contributions (QNECs) are corrective contributions used to fix plan testing failures or certain compliance issues.

Key features of QNECs

• • Amount: Varies depending on the issue being corrected.
  • Eligibility: Targeted to specific employees to correct testing failures, restore balances after errors, or satisfy top-heavy requirements.
  • Vesting: Must be 100% vested immediately.

Examples of when QNECs are used include:

• • Correcting failed ADP/ACP tests
  • Making up for missed elective deferrals or match contributions due to an administrative error.

Roth Nonelective Contributions

Thanks to SECURE 2.0, employers may now offer employees Roth treatment for nonelective contributions. Roth nonelective contributions are subject to the following rules:

• • Eligibility: Only fully vested nonelective contributions can be designated Roth.
  • Tax Treatment: Roth nonelective contributions are taxable to the employee in the year contributed.
  • Withdrawals: Contribution earnings not taxable if part of a qualified distribution.

401(k) providers and payroll systems are still adapting to support Roth nonelective contributions. Employers should confirm provider readiness before offering this option.

Employers that allow Roth nonelective contributions must eventually amend their plan documents to reflect the change. The current amendment deadline is December 31, 2026.

Comparing 401(k) Nonelective Contributions

Conclusion

Nonelective contributions offer employers a powerful toolset for meeting different plan goals—whether it’s ensuring testing compliance, rewarding employees, or correcting past errors. Employers should work with their 401(k) provider to determine the right mix of nonelective contributions based on their workforce, plan design goals, and financial flexibility. With proper planning, nonelective contributions can strengthen plan performance, reduce administrative burdens, and improve retirement outcomes for employees.