Qualified Automatic Contribution Arrangements (QACAs)

Qualified Automatic Contribution Arrangements (QACAs) are features in retirement plans like 401(k)s that automatically enroll employees with a preset contribution rate, which gradually increases over time. This system aims to boost employee participation and savings rates, while offering businesses tax incentives and satisfying non-discrimination testing requirements.
Author: Penelope Team
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You're probably familiar with the benefits of offering a retirement plan to the employees of your small business or nonprofit organization. You may have even decided you want to offer a Safe Harbor 401(k). Perhaps you’re even up to date on which states have retirement plan mandates. But what about QACAs?

This is your quick guide to Qualified Automatic Contribution Arrangements, also known as QACAs. We'll break down what they are, how they work, and the key differences between them and eligible automatic contribution arrangements (EACA).

You'll also get a rundown of QACA requirements, the pros and cons, and how to enroll your business or nonprofit organization. 

Confused? Don't worry, we've got your back with a handy FAQ section, too. Not to mention that, at any time, our retirement planning experts are just a call away.

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What Is a Qualified Automatic Contribution Arrangement (QACA)?

A QACA is a rule created under the Pension Protection Act of 2006 that aims to boost employee participation in employer-sponsored retirement plans, including 401(k)s and 403(b)s. Businesses use QACAs to automatically enroll employees unless they choose to opt out.

These plans operate under specific rules:

  • The QACA safe harbor matching contribution formula provides a 100% match on the first 1% of deferred compensation and a 50% match on deferrals between 1% and 6% (a total of 3.5%).
  • A Qualified Default Investment Alternative (QDIA) must be available to participants who do not actively choose an investment.
  • The plan's default deferral rate must begin at a minimum of 3% and increase by at least 1% each year to a minimum of 6% (with a maximum limit of 10%).

QACA safe harbor contributions may be subject to a cliff vesting schedule of up to two years.

How Qualified Automatic Contribution Arrangements (QACAs) Work

QACAs are designed to simplify the saving process for employees and employers. Once an employee is hired, they're automatically enrolled into their employer's retirement plan. The plans are set up so the employee deferral is usually 3% of their salary, though they can choose to contribute more.

With a QACA, the employee contribution increases automatically, typically by 1% until it reaches around 6%. The employee doesn’t have to lift a finger, it's all done for them.

Employees can, however, opt-out or adjust their contributions at any time. It's a system that's designed to make saving for retirement as painless as possible.

The Main Differences Between QACAs vs. EACAs

Before you dive into the main differences between QACAs and EACAs, it's essential to bear in mind that both systems aim to boost retirement savings, but they apply different strategies and offer unique benefits.

  • QACAs automatically enroll employees in retirement plans, gradually increasing their contribution over time. They also provide a safe harbor from non-discrimination testing, assuring that businesses are compliant with IRS rules.
  • EACAs (eligible automatic contribution arrangements) also auto-enroll employees. but contributions aren’t automatically increased. With an EACA, an employee can make immediate withdrawals within the first 90 days, giving them a safety net in case of an unexpected financial crisis. However, they don't offer a safe harbor provision. So, employers have to conduct nondiscrimination testing annually.

Understanding these differences can help you choose the right strategy for your company’s retirement savings plan.

QACA requirements

Your company's adherence to QACA requirements can significantly influence the success of your employees' retirement savings plans. It's essential to understand these requirements to ensure your plan's compliance.

  • You must automatically enroll eligible employees at a default contribution rate of 3-10%. You are required to provide an annual notice detailing the employees' rights and obligations.
  • If the automatic contribution arrangements (ACA) percentage is set at less than 6%, initially, the percentage must increase automatically each plan year after the initial period by a minimum of 1% until 6% is reached.
  • As soon as the ACA hits 6%, no further annual escalation is required.
  • The upper limit is 10%, which means that if the ACA percentage reaches to 10%, no more automatic increases are allowed.

Another QACA requirement is that, as an employer, you need to make a minimum matching or non-elective contribution and swiftly vest these contributions. 

  • QACA basic match: You match 100% on the first 1% of deferred compensation plus a 50% match on the next 5% of deferred compensation (effectively 3.5% for an employee contributing 6% of compensation).
  • QACA enhanced match: Your match is at least as generous as the QACA basic match at each tier of the match formula. 
  • QACA non-elective: You contribute 3% or more of each employee's compensation, regardless of whether the employee also makes elective deferrals.

Failing to meet these requirements could lead to penalties or even disqualification of your plan.

The pros and cons of a QACA

Weighing the benefits and drawbacks of implementing a QACA is crucial to make an informed decision for your company's retirement plan.

On one hand, you'll find that QACAs can boost employee participation rates, offer tax benefits and potentially aid you in meeting nondiscrimination testing requirements. A retirement plan with an employer match is also a great tool for employee retention.

On the flip side, you need to consider the increased costs associated with higher participation rates, as well as the administrative burden of managing these plans. You will also want to keep in mind the mandatory employer matching contributions.

It's essential to understand that QACAs aren't a one-size-fits-all solution. You must carefully evaluate your company's specific needs, financial capabilities, and long-term goals before jumping in.

How can a business enroll in a QACA 401(k) plan

  • You can start enrolling your business in a QACA 401(k) plan by first consulting a retirement planning adviser, and then choosing a plan administrator.
  • Our expert will guide you through the complexities and nuances of the process, ensuring you're making the best decisions for your business.
  • Once you've chosen a plan administrator, they'll help you set up the plan, manage enrollment, and handle ongoing administration.
  • It's important to communicate with your employees about the new plan. You'll need to explain the benefits and the automatic enrollment process.
  • Remember, under a QACA 401(k) plan, employees are automatically enrolled unless they opt out. So, it's crucial that they understand their options.

Lastly, always stay informed about any changes in the regulations to ensure compliance.

FAQ

You've got questions about QACA, and we're ready to answer them.

What does QACA mean for a 401(k)?

Let's break down how QACA can ramp up your 401k contributions automatically.

QACA, or Qualified Automatic Contribution Arrangement, is a feature your employer might add to your 401k plan. It's designed to boost your retirement savings by automatically increasing your contributions annually.

Here's how it works: Your initial contribution starts at a minimum of 3% of your salary. Each year, it's automatically increased by 1% until it hits 6%. If your employer offers a match, you're maximizing your potential for growth.

But remember, you're not locked in. If you're uncomfortable with the increase, you can opt out. One of the best features of a QACA is its automation, which encourages passive saving and makes it simpler for you to grow your nest egg.

What is the QACA matching formula?

You'll typically find it in your plan's summary document, provided by your employer or plan administrator.

This formula determines how much your employer matches your 401(k) contributions under a Qualified Automatic Contribution Arrangement.

Here's how it works: Your employer must match 100% of your contributions up to 1% of your compensation, then 50% of your contributions from 1% to 6% of your compensation.

So if you're contributing 6% or more, you're getting a total contribution of 3.5% of your compensation from your employer.

It's a good deal, but it's up to you to make sure you're contributing enough to get the full match.

Can you add QACA mid year?

Safe Harbor plans under QACA can incorporate a vesting schedule for the Safe Harbor contribution. This schedule, once set, cannot be increased during the middle of the year. However, it is possible to decrease or completely remove the vesting schedule at any time during the year.

Can a QACA be an EACA?

Yes, a QACA (Qualified Automatic Contribution Arrangement) can also be an EACA (Eligible Automatic Contribution Arrangement). 

An EACA is a type of automatic contribution arrangement that must uniformly apply the plan's default percentage to all employees after providing them with a required notice.

A QACA is a type of automatic contribution arrangement that satisfies the “safe harbor” provisions under IRC Sections 401(k)(13) and/or 401(m)(12), generally exempting the plan from actual deferral percentage (ADP) and/or actual contribution percentage (ACP) testing.

In order for a QACA to also be an EACA, it must meet the following additional requirements:

  • The plan must automatically enroll all eligible employees, unless they elect to opt out.
  • The plan must have a default contribution percentage of at least 3% of compensation, and the default contribution percentage must increase by at least 1% each year until it reaches at least 6% of compensation.
  • The plan must offer at least two investment options for automatic enrollment contributions.
  • The plan must provide employees with a notice explaining the automatic enrollment and contribution features of the plan, and employees must have the opportunity to opt out of automatic enrollment or change their contribution percentage.

If a QACA meets all of the above requirements, it will also be considered an EACA. This means that the plan will be exempt from ADP and ACP testing, and employees will have the right to withdraw their automatic enrollment contributions (with earnings) during a 90-day period after they are automatically enrolled.

What are the annual notice requirements for QACA?

The QACA annual notice requirements must be met at least 30 days but not more than 90 days before the beginning of each plan year. The notice must be provided to all employees who are eligible to participate in the QACA, including employees who are already automatically enrolled.

The QACA annual notice must include the following information:

  • The plan's default percentage rate for automatic enrollment contributions, including the amount and timing of any increases.
  • The type and amount of the employer contributions, if any.
  • The right to not participate in the QACA, and how to elect to not participate.
  • How to elect to contribute an amount different from the plan's default percentage rate for automatic enrollment contributions.
  • How to make an investment election, if the plan permits this.
  • If the QACA contains two or more investment options, how the plan will invest automatic enrollment contributions if the employee doesn't elect investment options.

The QACA annual notice must be written in a clear and concise manner that is understandable by the average employee. It is also important to note that the notice must be accurate and up-to-date.

What is a safe harbor 401(k) plan?

A safe harbor 401(k) is a retirement plan that allows you to bypass certain IRS nondiscrimination tests.

It's a great option if you're a high-earning employee or owner, as it lets you max out your contributions without worrying about failing these tests.

But it's not just for you. It's also beneficial for your employees. They receive mandatory employer contributions, either as a match or a nonelective deferral. This encourages them to save for their retirement, which can lead to greater job satisfaction and loyalty.

Conclusion

A QACA can be a game-changer for your business's 401(k) plan. While there are requirements to meet and some disadvantages, the benefits can outweigh them.

With automatic enrollment, higher contribution rates, and immediate vesting, it's worth considering. A QACA is not a one-size-fits-all solution, though. Examine your business's needs carefully before jumping in.

If you have any questions, feel free to schedule an appointment with our retirement planning experts and start your employees on the right track for retirement savings.

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