Qualified Automatic Contribution Arrangements (QACAs) are designed to augment employee participation in self-funded retirement plans such as 401(k), 403(b), and deferred compensation 457 plans. These arrangements automatically enroll workers at a minimum deferral rate of 3%, unless employees opt out.
Key Insights
- QACAs are automatic-enrollment retirement plans provided by employers.
- Employees are automatically enrolled with a matching contribution unless they decide to opt out.
- QACAs possess “safe harbor” provisions that exempt them from actual deferral percentage (ADP) testing requirements.
- Automatically enrolled at a minimum of 3% contribution, QACAs schedule an increase in employees’ contributions yearly.
Boosting Employee Retirement Participation
Automated enrollment plans, such as QACAs, have proven to raise participation rates. Despite this boost, initial contribution levels often start too low to meet retirement needs. One strategy to counteract potential underinvestment is for employers to increment the contribution rate yearly.
To meet compliance, as of 2022, employers must either:
- Contribute 100% of an employee’s contribution up to 1% of compensation, plus a 50% match for employee contributions between 1% and 6%.
- Provide a non-elective contribution of 3% to all participants.
Employer contributions may be subject to a two-year vesting period, with employees allowed the flexibility to choose different contribution levels or opt out entirely.
Safety and Compliance
QACAs are shielded by “safe harbor” provisions, removing the requirement for nondiscrimination testing regarding actual deferral percentages. If specific conditions are met, QACAs are also exempt from actual contribution percentage (ACP) testing, enhancing plan compliance and simplicity.
QACAs vs. EACAs: A Comparison
Employers can choose between QACAs and Eligible Automatic Contribution Arrangements (EACAs). EACAs necessitate a uniform default percentage and allow specific leniency with regards to contribution withdrawal. Unlike QACAs, EACA contributions are fully vested automatically, providing immediate access to accrued savings.
Growing Retirement Contributions
To prevent complacency with lower preset values, some employers increment employee contribution rates annually. The requirement for a QACA maintains that the deferred contribution start at 3% and increases yearly up to a maximum of 15%, a threshold raised by the SECURE Act of 2019 from 10%.
Vestment of QACA Contributions
Employer contributions under a QACA do not entail instant vesting. Vesting periods can extend up to two years, during which employees gradually earn rights to their matching contributions.
Increasing Retirement Savings Participation
Opt-out mechanisms embedded in QACAs significantly boost participation in retirement savings programs. Although this improves enrollment, many employees still contribute insufficiently to meet retirement needs due to adherence to low initial settings.
Understanding Automatic Contribution Notices
These notices inform employees about their automatic enrollment in either a QACA or EACA. Employers must issue these notices 30 to 90 days before the plan year begins, or upon hiring when immediate enrollment is used.
Related Terms: EACA, 401(k), 403(b), vesting, automatic enrollment, retirement plan contributions.
References
- U.S. Securities and Exchange Commission. “FAQs - Auto Enrollment - Are There Different Types of Automatic Contribution Arrangements for Retirement Plans?”
- U.S. Department of Labor. “Automatic Enrollment 401(K) Plans for Small Businesses”, Page 2-8.
- The Royal Swedish Academy of Sciences. “The Prize in Economic Sciences 2017”.
- Internal Revenue Service. “When must an employer notify employees of the retirement plan’s automatic contribution” “arrangement?”
