Qualified automatic contribution arrangement

Qualified automatic contribution arrangement, also known as QACA s another safe harbor plan design that incorporates automatic enrollment feature into the plan. It was established under the Pension Protection Act as one of the solution to increase workers' participation in self-funded defined contribution retirement plans such as for example 401(k). Currently companies that operate under QACAs automatically enroll employees in the plans at a negative deferral rate, unless they specifically opt-out. A QACA must apply the automatic contribution rate. This rate has to be specified in the plan, to new employees and current employees who have not made an affirmative election to participate or not participate in the plan. QACA must be performed with the relation to some contribution (automatic contribution rate and safe harbor employer contribution).

When it comes to the execution date a QACA must become effective on the first day of the Plan Year.

Automatic contribution rates

QACA needs to provide a specific automatic contribution rate for employees who do not have an affirmative salary deferral election in place. In general such rate must be a uniform percentage of compensation, which cannot exceed 10% and have to meet the following minimum percentages:

• Initial period — the minimum percentage is 3% of compensation.  The initial period begins on the day the employee first participates in the QACA and ends on the last day of the following plan year.
• Second year — the minimum percentage is 4% of compensation.
• Third year — the minimum percentage is 5% of compensation.
• Fourth year — the minimum percentage is 6% of compensation.

Safe harbor employer contributions

Despite of automatic contribution, a QACA has to provide safe harbor employer contribution. There are two types of such handout:

• Safe harbor matching contribution — 100% of elective contributions up to 1% of compensation and 50% of elective contributions between 1% and 6% of compensation.
• Safe harbor employer contribution — 3% of compensation for all employees eligible for the plan. 

Differences between QACA and EACA

Apart from basic automatic contribution arrangement, a plan sponsor may choose an eligible automatic enrollment arrangement (EACA) or a qualified automatic enrollment arrangement (QACA).

An EACA is the type of automatic contribution arrangement. It must uniformly apply the plan's default percentage to all employees after providing them with a required notice. The employees is enabled to withdraw automatic enrollment contributions (with earnings) by making a withdrawal election as required by the terms of the plan (no earlier than 30 days or later than 90 days after the employee's first automatic enrollment contribution was withheld from the employee's wages). Employees are 100% vested in their automatic enrollment contributions.   A QACA is an automatic contribution arrangement with special "safe harbor" provisions. A QACA have to indicate a schedule of uniform minimum default percentages starting at 3% and gradually increasing with each year that an employee participates. While QACA is chosen, an employer must make a minimum of either:

• a matching contribution of 100% of an employee's contribution up to 1% of compensation, and a 50% matching contribution for the employee's contributions above 1% of compensation and up to 6% of compensation; or 
• a nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute any amount to the plan.

Under a QACA, employees must be 100% vested in the employer's matching or nonelective contributions after no more than 2 years of service.

Examples of Qualified automatic contribution arrangement

• A popular example of a QACA is the 401(k) plan. Under this plan, employees are automatically enrolled in the plan and contributions are deducted from their paycheck unless they choose to opt-out. Employers may set the contribution rate at a minimum of 3% to a maximum of 10%.
• Another example of a QACA is the SIMPLE IRA plan. This plan is available to employers with 100 or fewer employees. Employees are automatically enrolled in the plan and contributions are deducted from their paycheck unless they choose to opt-out. Employers must contribute either 2% of employee's compensation or a matching contribution of up to 3% of employee's compensation, whichever is greater.
• 403(b) plans are another example of a QACA. Under this plan, employees are automatically enrolled in the plan and contributions are deducted from their paycheck unless they choose to opt-out. Employers may set the contribution rate at a minimum of 3% to a maximum of 10%.

Advantages of Qualified automatic contribution arrangement

A Qualified automatic contribution arrangement (QACA) offers a number of advantages to employers and employees. These include:

• Automatic enrollment allows employees to start saving for retirement without having to take any action. This helps to ensure that all employees are saving for their future, even those who may not be familiar with the importance of saving for retirement.
• Employers can set default contribution rates, which are typically higher than those employees would choose on their own. This helps to ensure that employees are saving enough for retirement.
• Employers can also set automatic increases in contribution rates, so that employees are saving even more for retirement in the future.
• QACAs can be designed to include incentives for employees, such as employer matching contributions or other rewards for increased contributions.
• QACAs are exempt from some of the more complex non-discrimination testing requirements. This makes them easier to manage than other types of retirement plans.

Limitations of Qualified automatic contribution arrangement

One of the limitations of Qualified Automatic Contribution Arrangements (QACAs) is their lack of flexibility. QACAs have strict rules that must be followed, such as initial automatic enrollment at a negative deferral rate and lack of ability to customize the plan design. Below are some other limitations of QACAs:

• QACAs are only applicable to defined contribution plans, such as 401(k)s, and cannot be applied to defined benefit plans.
• QACAs are only available to employers with 100 or fewer employees.
• Employers must make contributions to employees’ accounts, unless the employee opts out.
• QACAs are subject to annual nondiscrimination testing, which can be expensive and time-consuming.
• QACAs do not have the ability to customize plan design features, such as contribution rates and investment options.
• QACAs have a limited ability to modify employee contributions and investments.

Other approaches related to Qualified automatic contribution arrangement

• Automatic Escalation - This approach involves increasing the employee contributions each year, typically by 1-2%, to help employees save more for retirement.
• Target-Date Funds - This approach allows employers to invest employee contributions into diversified portfolios that are tailored to their retirement goals.
• Matched Contribution - This approach is where employers match a certain percentage of their employees' contributions up to a certain amount.
• Financial Education - This approach is where employers provide financial education and other resources to their employees to help them make smart decisions when it comes to their retirement savings.

In summary, other approaches related to Qualified Automatic Contribution Arrangement (QACA) include Automatic Escalation, Target-Date Funds, Matched Contribution, and Financial Education. All of these approaches are designed to help employees save more for their retirement.

Footnotes

Qualified automatic contribution arrangement — recommended articles

Cafeteria system — Interest in possession trust — Cafeteria plan — Adjustable Life Insurance — Employee leasing — Disclaimer trust — Single use plan — Overtime premium — Lieu days

References

• Buckley, J. (2018).Mandated Benefits 2019 Compliance Guide (IL), Wolters Kluwer, New York
• Ernst & Young LLP, (2014).EY Tax Guide 2015, John Wiley & Sons, New York
• Frolik, L. Moore, K. (2012).The Law of Employee Pension and Welfare Benefits, LexisNexis, New York
• Topelski, J. (2011).401(k) Plans and Retirement Savings: Issues for Congress, Congressional Research Service, Washington
• Wise, D. (2007).Perspectives on the Economics of Aging, The University of Chicago Press, Chicago

Author: Weronika Włodarska