On a Christmas Eve stop to deliver toys at an orphanage, a baby boy named Buddy crawls into Santa Claus’s sack of gifts and ends up at the North Pole, where Papa Elf volunteers to raise him.
Buddy is at least four feet taller than the other elves, and his toy-making skills are not able to keep up with the elves’ high quotas. Buddy learns he is human, and Papa Elf reveals that he was born to Walter Hobbs and Susan Wells and then given up for adoption. Susan has died, and Walter, who never knew of Buddy’s existence, works at a children’s book company in New York City.
Buddy decides to go to New York City to find his father, who, he learns, is on the naughty list. Buddy, dressed in a head-to-toe elf costume, is assumed to be a Gimbels department store elf. At Gimbels he meets Jovie, a Gimbels employee.
Walter learns by way of a DNA test that Buddy is, in fact, his son. He takes Buddy home to meet his family, which includes Buddy’s 12-year-old half-brother, Michael. Buddy stuns the family by his childlike enthusiasm, eccentric food tastes, and insistence that he walked there from the North Pole.
After Walter becomes angry at Buddy and tells him to leave, Michael, worried, persuades Walter to help look for Buddy. They find Buddy in Central Park where Santa’s sleigh has crashed. Because the engine runs on Christmas spirit, only believing in Santa can make the sleigh fly again. To raise Christmas spirit across the City, Michael reads Santa’s list in front of TV cameras and a crowd gathered outside the park. Jovie leads the crowd in “Santa Claus is Coming to Town” on live TV, saying “the best way to spread Christmas cheer is singing loud for all to hear!” Once Walter begins to sing along, the sleigh is powered up to save Christmas.