What are Qualified Automatic Contribution Arrangements (QACAs)?
Also known as QACAs, Qualified Automatic Contribution Arrangements refer to a rule established under the Pension Protection Act of 2006 as a way to increase workers' participation in self-funded defined contribution retirement plans such as 401(k), 403(b), and the deferred compensation 457(b) plans. As of January 1, 2008, companies that use QACAs automatically enroll workers in the plans at a negative deferral rate, unless employees specifically opt-out.
How Qualified Automatic Contribution Arrangements Work
Encouraging retirement saving at work has been a problem economists and policymakers have sought to solve. Even though many employers offer 401(k) or 403(b) defined contribution plans, research has found that plan enrollment and contribution levels remain low. One solution has been to implement an opt-out plan, where employees are automatically enrolled and must elect to stop participating, rather than opting-in as traditional plans are structured.
Opt-out plans tend to raise participation rates. However, they generally start at employee contribution levels that are far too low to meaningly help them in retirement. This is hurtful to employees who tend not to take any action on their own, as they continue to underinvest over the long term. Without an education effort to periodically remind employees that, for example, a 3% contribution is just a starting point, many may not save enough over the long run. For this reason, some argue that opt-out plans tend to lower employees’ total retirement contributions. To counter this possibility, some employers raise the employee contribution rate by 1% each year, although this still may not be enough to help workers reach their retirement goals.
As of 2018, under QACA, an employer must do one of the following:
- Contribute 100% of an employee’s contribution up to 1% of his or her compensation, along with a 50% matching contribution for the employee’s contributions above 1% (and up to 6%); or
- Deliver a non-elective contribution of 3% of compensation to all participants.
Employer contributions can be subject to a two-year vesting period unlike traditional 401(k)s, in which employer contributions are immediately vested. Employees must be given adequate notification about the QACA, as well as the ability to opt out completely or to participate at a different, specific contribution level.
QACAs also have “safe harbor” provisions that exempt a 401(k) plan from nondiscrimination testing requirements for annual actual deferral percentage (ADP) and actual contribution percentage (ACP). A QACA also may not distribute the required employer contributions due to an employee’s financial hardship.
- Qualified Automatic Contribution Arrangements (QACAs) are a form of automatic-enrollment retirement plan offered by employers.
- As an opt-out plan, employees will automatically be enrolled with a matching contribution unless they choose to leave the plan.
- QACAs have special “safe harbor” provisions that exempt a 401(k) plan from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination testing requirements.
- A QACA must specify a schedule of uniform minimum default percentages starting at 3% and gradually increasing with each year that an employee participates.
QACAs vs. EACAs
The PPA defines two different choices for employers seeking to add an automatic contribution arrangement: QACAs and EACAs. An eligible automatic contribution arrangements (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. It may allow employees 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.
QACAs provide employers safe harbor provisions exempting them from actual deferral percentage and actual contribution percentage (ADP/ACP) testing that other plans must undergo to ensure they do not discriminate against lower-paid employees. In return, employers must make matching contributions as required by the IRS and must vest matching and non-elective contributions within two years. The default deferred contribution for a QACA must also increase annually from at least 3% the first year to at least 6%, with a maximum of 10% in any year.
QACAs and Additional Forms of Retirement Plans
In addition to QACAs, employers may offer employees a range of retirement options such as traditional 401(k)s, 403(b)s and 457(b)s. A 401(k) plan is a qualified employer-established plan (i.e. it meets Internal Revenue Code Section 401(a) requirements of and is thus eligible to receive certain tax benefits).
Employees that are eligible for a 401(k) plan may make salary deferral contributions on a post-tax and/or pretax basis. In turn, employers may make matching or non-elective contributions to an employee’s 401(k) plan and may also add a profit-sharing feature. Earnings in a 401(k) plan accrue on a tax-deferred basis.
A 403(b) plan is specific to employees of public schools, tax-exempt organizations, and ministers. These plans generally invest in annuities and/or mutual funds. A 403(b) plan is also another name for a tax-sheltered annuity plan.
Finally, a 457 plan is a non-qualified, tax-advantaged deferred compensation retirement plan, in which employees are allowed to make salary deferral contributions. As with 401(k)s, earnings in a 457 plan grow on a tax-deferred basis, and contributions are not taxed until the assets are distributed.