Qualified automatic contribution arrangements (QACAs) are a type of 401(k) plan that includes automatic-enrollment for eligible employees.
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Like other auto-enrollment plans, QACA provisions increase 401(k) participation and help employees save more for retirement.
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However, in addition to basic auto-enrollment requirements, QACA plans must meet specific qualification guidelines. In exchange, the 401(k) plan will not be subject to certain annual IRS-required compliance testing, which can be quite costly for plans that fail.
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If you’re interested in initiating a QACA plan with Guideline, here are the requirements and benefits employers should know.
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In order to be eligible for a QACA plan, several provisions must apply:

As the name implies, with automatic enrollment plans, eligible employees are automatically enrolled into a 401(k) plan after a set deadline – either when the plan first begins or when an employee becomes eligible. This means even if a participant fails to take action, they’ll begin contributing on a per-paycheck basis according to the plan’s default deferral rate unless they opt out or choose their own contribution amount.
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For a QACA plan with Guideline, the default rate must be set to at least 3% but cannot exceed 15%.
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Employees have the option to opt-out of contributing or change their deferral rate at any time, even after they have been automatically enrolled. Once they make an affirmative election (by setting their own deferral rate), they will no longer be subject to the automatic deferral provision as long as they remain employed. However, if they leave employment and are subsequently rehired, they will need to make a new affirmative election to avoid the automatic rate.
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QACA plans allow automatically enrolled participants to get a refund of the money that was automatically deferred (along with any earnings), provided they request the refund within 90 days of the first payroll that included an automatic deferral. Once this deadline has passed, the participant will not be able to remove the money from the plan until they are eligible to take a distribution of all assets.
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With automatic escalation, participants who have been automatically enrolled (and have not elected their own deferral rate) will have their deferral rates increased on an annual basis until a certain percentage has been reached.
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To meet QACA standards, deferrals must increase to at least 6% but can go as high as 15%. While there is flexibility in setting the automatic escalation schedule, plans at Guideline must meet the following minimums each year:

For plans with a starting deferral rate of 6%, auto-escalation is not required. Additionally, if a participant makes an affirmative election, the auto-escalation will no longer apply.
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A safe harbor provision generally allows plans that meet certain requirements to automatically pass certain annual IRS-required compliance testing, including the annual deferral percentage (ADP) test, and, in some cases, the actual contribution percentage (ACP) test and Top-Heavy test (provided no other employer contributions are made).
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The rules for a QACA safe harbor plan are generally the same as with traditional safe harbor, however, the required employer matching contribution formula is different.
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For a QACA plan that elects the basic safe harbor matching formula, the company must match 100% of all employee 401(k) contributions, up to 1% of their compensation, plus a 50% match of the next 5% of their compensation.
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Just like a traditional safe harbor plan, a QACA plan has the option of using an enhanced safe harbor matching formula. The general rule is that the enhanced match must be at least as good at each deferral level as the basic match and the total match cannot be based on a deferral that exceeds 6% of compensation. The most common enhanced match is 100% of employee deferrals up to 3.5% of their compensation.
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A QACA plan will also have the option of making a safe harbor nonelective contribution. Here, the rules for the QACA are the same as for a traditional safe harbor plan. The company must contribute at least 3% of each employee’s compensation (not to exceed 25%), regardless of whether employees elect to defer into the plan. This means that even if an employee doesn’t personally contribute, they will still receive the designated employer nonelective each pay period.
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Although the automatic escalation provision will only apply to those automatically enrolled under the plan, the safe harbor contribution must be given to all employees eligible to receive a contribution under the plan.
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QACA plans differ from a traditional safe harbor plan in the ability to apply a vesting schedule to QACA safe harbor contributions. In a traditional safe harbor plan, all safe harbor contributions must be 100% vested as soon as they are made. However, in a QACA safe harbor plan, a vesting schedule of up to two years can be applied.
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Most commonly, a two-year cliff vesting schedule (where participants are not vested at all until they become fully vested after two years with the company) is used. Alternatively, a graded vesting schedule can be applied as long as all participants are fully vested by the time they have earned two years of vesting service.
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Just like other automatic enrollment and safe harbor plans, a QACA plan has specific notice requirements for employees. These notice requirements combine the standard automatic enrollment and safe harbor notice requirements along with additional automatic escalation notification.
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You can learn more about the difference between traditional safe harbor and QACA plans here.
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Because QACA plans require a lower employer match commitment as a percentage of employees’ deferrals, these plans can be less costly for employers while still receiving the benefits of safe harbor status. Additionally, while traditional safe harbor plans require immediate vesting, QACA plans allow for a vesting schedule, which can help with employee retention.
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QACA auto-escalation features can also benefit your employees by increasing their auto-deferrals each year, effectively helping them save more toward retirement.