Long ago, on Christmas Eve, a baby in an orphanage climbed into Santa's (ED ASNER) gift sack and made a surprise trip to the North Pole. Raised by Papa Elf (BOB NEWHART) and with his human heritage kept secret from him, Buddy (WILL FERRELL) grew up thinking he was an elf just like everyone else, except for his enormous size and inability to assemble toys as quickly as his counterparts.
He eventually learns of his true identity, however, with Santa telling him that his real father, Walter Hobbs (JAMES CAAN), is a book publisher who lives in New York City and is on the famous naughty list. Undeterred by that, Buddy then sets out on a long trek to meet the father who doesn't know he even exists.
With the North Pole as his only point of reference, Buddy is shocked and amazed by the big city, but he's not as surprised as Walter is upon meeting his good-natured, but childlike adult son for the first time. Walter's wife, Emily (MARY STEENBURGEN), readily accepts him into their family as her stepson, but ten-year-old Michael (DANIEL TAY) initially isn't as friendly.
Buddy wants to spend time with his dad, but ends up mistaken by a Gimbles department store manager (FAIZON LOVE) as one of his Christmas workers. There, he meets Jovie (ZOOEY DESCHANEL), a disillusioned young woman who hates her job and is bored with life.
As Buddy tries to fit into his new surroundings, he constantly gets in his father's way. With Christmas around the corner and Santa suddenly needing help due to an energy drop-off caused by diminished Christmas spirits, Buddy and his new friends set out to save the day.