Key Takeaways
- Automatically enrolls employees at 3%+ deferral rate.
- Employer contributions require two-year cliff vesting.
- Bypasses IRS nondiscrimination testing with safe harbor status.
- Mandates annual contribution escalation to at least 6%.
What is Qualified Automatic Contribution Arrangements (QACAs)?
A Qualified Automatic Contribution Arrangement (QACA) is a type of safe harbor feature in 401(k) plans that automatically enrolls eligible employees at a minimum deferral rate of 3% of their compensation, gradually escalating contributions over time. This design helps increase participation and simplifies plan compliance by exempting employers from annual nondiscrimination testing. QACAs require specific employer contributions and impose a two-year cliff vesting schedule on those contributions, distinguishing them from other automatic enrollment options.
QACAs align with safe harbor provisions, similar to those found in safe harbor plans, ensuring regulatory compliance while promoting employee savings.
Key Characteristics
QACAs combine automatic enrollment with specific employer requirements to enhance retirement savings and ease plan administration.
- Automatic Enrollment: Employees are enrolled at a starting deferral rate of 3% to 10% of compensation, with mandatory escalation if below 6%.
- Employer Contributions: Employers must provide a basic or enhanced matching contribution or a nonelective contribution of at least 3% of compensation.
- Two-Year Cliff Vesting: Employer contributions vest fully only after two years of service, unlike immediate vesting in other plans.
- Nondiscrimination Testing Relief: QACAs exempt plans from annual ADP/ACP tests, reducing administrative burdens.
- Qualified Default Investment Alternative: Contributions default to an investment option compliant with the qualified default investment alternative (QDIA) rules, protecting employees who do not make explicit investment choices.
How It Works
QACAs automatically enroll eligible employees at a minimum contribution rate, which escalates by at least 1% annually until reaching 6%, unless the initial rate is already 6% or higher. Employees can opt out or select different deferral rates at any time, providing flexibility within the automatic framework.
Employers must select one of three safe harbor contribution methods: a basic match, an enhanced match, or a nonelective contribution. These contributions are subject to a two-year cliff vesting schedule, meaning employees must complete two years of service to retain employer contributions. This design balances incentivizing participation with employer cost control.
Examples and Use Cases
QACAs work well for companies seeking to increase retirement plan participation and simplify compliance, especially those with lower engagement.
- Airlines: Delta utilizes automatic enrollment features similar to QACAs to encourage employee savings while managing plan complexity.
- Small Businesses: Smaller firms benefit from QACAs due to tax credits and reduced nondiscrimination testing requirements, making it a practical option to boost employee retirement readiness.
- Investment Selections: QACAs often use default options aligned with low-cost index funds, similar to recommendations in best low-cost index funds, helping employees grow savings efficiently.
Important Considerations
When implementing a QACA, employers should provide clear notices to employees about automatic enrollment and their rights to opt out or change deferral rates. Uniform application of the plan terms is essential to maintain safe harbor status and avoid compliance issues.
Additionally, employees should understand the two-year cliff vesting on employer contributions, which differs from other automatic enrollment arrangements and may impact retention incentives. Employers can also review complementary options such as deemed automatic contributions and automatic annual increases to tailor the plan to their workforce needs.
Final Words
QACAs streamline 401(k) plan administration while boosting employee participation through automatic enrollment and escalation. To optimize your plan’s benefits, review your current contribution schedules and consider implementing or adjusting a QACA to maximize tax credits and compliance ease.
Frequently Asked Questions
A QACA is a safe harbor feature in 401(k) plans that automatically enrolls eligible employees at a minimum 3% contribution rate, escalates that rate over time, and exempts the plan from certain IRS nondiscrimination tests while requiring specific employer contributions and a two-year vesting schedule.
Employees are automatically enrolled at a starting deferral rate between 3% and 10%, with rates below 6% required to increase by at least 1% annually until reaching 6%. Employees can opt out or change their contribution rates at any time.
Employers must provide either a basic match, an enhanced match, or a nonelective contribution of at least 3% of compensation to all eligible employees, including those who opt out of deferrals, with contributions subject to a two-year cliff vesting schedule.
QACAs simplify compliance by satisfying safe harbor rules that avoid annual IRS nondiscrimination testing, reducing administrative burden and the risk of refunds or plan corrections, while also qualifying small employers for tax credits under the SECURE Act.
No, employer contributions under a QACA are subject to a two-year cliff vesting schedule, meaning employees forfeit those contributions if they leave the company before completing two years of service.
Yes, employees are always 100% vested in their own deferrals, regardless of the vesting schedule applied to employer contributions.
Employees can opt out of automatic enrollment or change their contribution rate at any time, overriding the automatic schedule established by the QACA.
No, employer contributions made under a QACA cannot be distributed for hardship withdrawals until vested and subject to plan rules.
