As a plan sponsor, offering a 401(k) plan with an automatic enrollment feature is a great way to increase participation and help your employees save more for retirement.
With an automatic enrollment provision, eligible employees are automatically enrolled in your 401(k) plan by a set deadline – either when the plan starts or as they become eligible. Before the auto-enrollment begins, employees have the option to opt-out or self-enroll and choose their own contribution rate. However, if they take no action, they will begin auto-contributing based on the plan’s default contribution rate as a traditional (or pre-tax) 401(k) contribution.
But, there’s more than one automatic enrollment option, and not all are created equal. The three types of automatic enrollment plans include:
Automatic contribution arrangement (ACA)
Eligible automatic contribution arrangement (EACA)
Qualified automatic contribution arrangement (QACA)
The arrangement you choose can affect everything from when you can begin your plan to employer contribution requirements. Here’s what you should know about the various arrangements available, and how to choose the right one for your business.
Automatic contribution arrangement (ACA)
An ACA 401(k) plan includes a basic automatic enrollment provision. Employees must be notified that they will automatically be enrolled in the plan unless they elect otherwise and must specify the default deferral rate that will be automatically deducted from their paychecks for contributions to the plan. The document must also explain that employees can choose to opt out or elect a different contribution percentage.
Note that Guideline only supports ACA for plans unable to add EACA or QACA when first setting up the plan with us (for example, when converting to Guideline mid-year). Sponsors must choose to move to either an EACA or QACA plan before the start of their first full plan year with Guideline.
Eligible automatic contribution arrangement (EACA)
An EACA plan is similar to a basic automatic enrollment plan but has additional notice requirements.
There are two benefits specific to EACA plans:
An extended timeframe to correct a failed average deferral percentage (ADP) and average contribution percentage (ACP) test. Instead of the normal two and a half months after the end of the plan year, plans with an EACA feature will have six months after the end of the plan year to correct the failure without incurring any types of penalties.
Automatically enrolled participants can receive a refund of their contributions if requested within 90 days of the first auto-contribution. This can reduce the number of participants with small balances.
Qualified automatic contribution arrangement (QACA)
A QACA plan is a variation of a traditional safe harbor 401(k) plan. QACA plans must include certain features, such as automatic enrollment, automatic annual deferral increases, and mandatory minimum employer matching. Please note that for all Guideline plans, those that have a QACA provision are designed to also meet the requirements to be an EACA. This means they will also have the testing extension and refund options detailed above.
In exchange for adopting safe harbor provisions, the plan will also automatically satisfy certain IRS-required annual compliance testing, including the automatic deferral percentage (ADP) test and, in some cases, the actual contribution percentage (ACP) test and the Top-Heavy test.
Guideline comparison guide of ACA, EACA, and QACA
1) Only supported for conversion plans
2) Requirement for Guideline plans