Qualified automatic contribution arrangement (QACA)

What a QACA is

A qualified automatic contribution arrangement (QACA) is the automatic-enrollment version of a safe harbor 401(k). The plan enrolls every eligible employee who does not make their own election at a uniform default rate. The default must be at least 3% during an initial period that runs through the end of the plan year after the employee’s first default deferral, then at least 4%, 5% and 6% in the years that follow. It cannot exceed 15% (10% in the initial period).

The employer must make one of two contributions:

• A match of 100% of the first 1% of pay deferred plus 50% of the next 5%, which tops out at 3.5% of pay.

• A nonelective contribution of at least 3% of pay to every eligible employee.

Why it matters to employers

A QACA gives the same pass on ADP and ACP testing as a regular safe harbor plan, with two differences that lower cost: the required match tops out at 3.5% of pay instead of 4%, and employer contributions can vest on a schedule of up to two years instead of immediately. The trade is more administration, because defaults, annual increases and notices all have to run on time.

Example

An employee earning $50,000 is enrolled at 3% and never changes it. Deferrals are $1,500 in year one and the QACA match is $500 (100% of the first 1%) plus $500 (50% of the next 2%), or $1,000. By the time the default reaches 6%, the match is $1,750 a year.

Common mistakes

• Failing to enroll an employee on time, or failing to apply the scheduled increase. Both are operational errors that need correction.

• Sending the annual notice late. It is due 30 to 90 days before each plan year.

• Confusing a QACA with an EACA. An EACA has no required employer contribution and gives no testing pass.

• Forgetting to invest defaulted money in a qualified default investment alternative (QDIA).