DEFINITION of 'Qualified Automatic Contribution Arrangements (QACAs)'

Also known as QACAs, Qualified Automatic Contribution Arrangements were 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)s, 403(b)s and the deferred compensation 457(b)s. Beginning January 1, 2008, companies that use QACAs automatically enroll workers in the plans at a negative deferral rate, unless they specifically opt-out.

BREAKING DOWN 'Qualified Automatic Contribution Arrangements (QACAs)'

In March 2018 under a QACA, an employer must do one of the following:

  1. 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%).
  2. Deliver a nonelective 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.

QACAs and Additional Forms of Retirement Plans

In addition to QACAs, employers may offer employees a range of retirement options such as 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.

  1. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  2. 457 Plan

    457 plan refers to a non-qualified, tax-advantaged deferred compensation ...
  3. Qualified Acquisition Cost

    Qualified acquisition cost includes IRA withdrawals that constitute ...
  4. Annual Addition

    The annual addition is the total dollar amount contributed in ...
  5. Salary Reduction Contribution

    A salary reduction contribution is a contribution made to a retirement ...
  6. Savings Incentive Match Plan For ...

    A Savings Incentive Match Plan For Employees Of Small Employers ...
Related Articles
  1. Retirement

    Voluntary 401(k) Contributions: A Thing Of The Past?

    Contributing to your retirement plan may no longer be voluntary, but automatic enrollment has a number of benefits.
  2. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  3. Retirement

    401(k) Contribution Limits in 2017-18

    Find out what the contribution limits are for 401(k) retirement savings plans in 2017-18, including individual, employer and aggregate limits.
  4. Retirement

    Retirement Savings Tools I: Employer Savings Plans

    There are a variety of employer savings plans that can offer multiple routes to saving for retirement.
  5. Financial Advisor

    457 plans versus 403(b) plans: A comparison

    There's plenty of advice about 401(k) plans, but what about 457 and 403(b) plans? Find out what these plans are about and the differences between them.
  6. Retirement

    5 Key Features of 401(k) Plans

    Understanding your 401(k) options and making the right decisions can have a big impact on your retirement savings.
  7. Retirement

    SIMPLE IRA Contribution Limits in 2016

    Learn the SIMPLE IRA contribution limits for 2016, with a brief summary of how the plan works, including eligibility and contribution and distribution rules.
  8. Retirement

    Got a 403(b) Plan? Here's What You Need to Know

    Many folks do not understand the ins and outs of their 403(b) plan. Let's change that.
  1. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Find out why contributions to IRA, Roth IRA and 401(k) retirement savings plans are limited by the IRS, including what the ... Read Answer >>
Trading Center