Qualified automatic contribution arrangement

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Qualified automatic contribution arrangement
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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)[1].

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[2]:

  • 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[3]:

  • 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[4].   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[5].

Footnotes

  1. Topelski J (2011)
  2. Wise D (2007)
  3. Frolik L, Moore K (2012)
  4. Buckley J (2018)
  5. Ernst & Young LLP (2014)

References

Author: Weronika Włodarska