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Traditional safe harbor vs. qualified automatic contribution arrangement (QACA) plans
Traditional safe harbor vs. qualified automatic contribution arrangement (QACA) plans
Updated over a week ago

At Guideline, we offer traditional safe harbor 401(k) plans as well as qualified automatic contribution arrangement (QACA) safe harbor plans. This guide will cover the similarities and differences between these two plan types.

What is a safe harbor 401(k) plan?

A safe harbor 401(k) allows small business owners to offer their employees retirement accounts while worrying less about IRS nondiscrimination testing. Safe harbor plans automatically satisfy most IRS nondiscrimination tests, including the actual deferral percentage (ADP) and, in some cases, the actual contribution percentage (ACP) and Top-Heavy tests if certain other conditions are met.

To receive this added benefit, safe harbor plans must meet certain requirements, such as making employer contributions to employees’ accounts. A safe harbor match incentivizes all employees to contribute and take advantage of the plan.

What are the types of safe harbor plans?

There are generally two types of safe harbor plans available: traditional and QACA.

Traditional safe harbor plans

A traditional safe harbor plan requires a specific formula for employer contributions, that the contribution vests immediately, and that specific notices are sent to employees.

While automatic enrollment is typically optional for traditional safe harbor plans, all Guideline plans include this feature. Find out why we believe in the power of automatic enrollment for employers and employees alike.

QACA safe harbor plans

A QACA safe harbor plan differs from a traditional safe harbor plan in that it must include an automatic contribution arrangement with an auto-escalation feature, allows slightly lower employer matching contributions, and permits a short vesting schedule to the employer safe harbor contributions.

Because QACA plans require a lower employer match commitment as a percentage of employees’ deferrals, these plans can be less costly for employers who are still interested in receiving the benefits of safe harbor status. Additionally, QACA plans may help with employee retention, as a vesting schedule can be applied.

QACA plans also include an auto-escalation feature, which will increase employees’ auto-deferrals each year, helping them save more toward retirement.

Can a plan change to a traditional safe harbor or QACA plan mid-year?

Current IRS guidelines only permit a plan to switch between a traditional and QACA safe harbor at the beginning of a plan year. In general, traditional and QACA safe harbor plans follow the same rules for mid-year changes.

Traditional safe harbor vs. QACA comparison guide

Traditional Safe Harbor

QACA Safe Harbor

Automatic enrollment*

Optional; all Guideline plans include automatic enrollment

• Minimum 3% in year 1

• Minimum 4% in year 2

• Minimum 5% in year 3

• Minimum 6% in year 4

• (Maximum 10%)**

For for plans starting with a default rate of at least 6% or for employees who set their own deferral rates (elective deferrals), no auto-escalation is required

Employer contributions

Basic match: 100% of the first 3% of employee deferrals, plus 50% from 3-5% of employee deferrals. For a maximum of 4% match.

Enhanced match: At least a minimum of 100% of the first 4% of employee deferrals, but cannot provide matching for deferrals over 6%.

Nonelective: Employers must contribute a minimum of 3% of each eligible employees’ annual compensation, regardless of whether they contribute to the plan.

Basic match: 100% up to 1% of employee deferrals, plus 50% from 2-6% of deferrals. For a maximum of 3.5% match.

Enhanced match: At least as much as the QACA basic match at each tier of the match formula, but cannot provide matching for deferrals over 6%.

Nonelective: Same as traditional safe harbor.

Vesting requirements on safe harbor contributions

100% immediate vesting required

Permits up to a two-year cliff or graded schedule

ADP testing

Automatically satisfied

Same as traditional safe harbor

ACP/Top-Heavy testing ***

Automatically satisfied if certain conditions are met

Same as traditional safe harbor

IRS safe harbor notice requirement

Notices must be distributed to all plan participants prior to initial plan eligibility (but no more than 90 days before eligibility) and at least 30 days (and not more than 90 days) before the beginning of each plan year.

No notice requirement for nonelective plans.

Same as traditional safe harbor.

Additionally, the safe harbor notice must include certain automatic enrollment, automatic escalation, and investment information.

Note: Green blocks indicate the same features apply to both plans.

This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax advantaged retirement plan for you.

* All Guideline plans include an automatic enrollment feature.
** While a maximum of 15% is allowable by the IRS, Guideline auto-escalation reaches a maximum at 10%. Guideline may support up to 15% for conversion plans when necessary.
*** Safe harbor 401(k) plans generally automatically satisfy ACP/Top-Heavy requirements, except for plan years in which the employer makes discretionary contributions (such as profit sharing contributions) in addition to safe harbor contributions.

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