A Qualified Automatic Contribution Arrangement (QACA) combines automatic enrollment provisions with the IRS’ Safe Harbor provisions. Thus, QACA plans increase participation among employees while also making the plan exempt from certain nondiscrimination testing and allow HCE’s to maximize their annual 401(k) contributions.
QACA provisions require a minimum of 3% automatic enrollment; however, certain annual escalations may be necessary such that by year five, an automatically enrolled employee must have at least a 6% contribution rate. You may opt to begin year one with 6% as the automatic enrollment percentage to avoid the required escalations, but in no event can the automatic withholding exceed 10% of annual compensation.
Secure Act 2.0 requires new 401(k) plans to automatically enroll participants upon attaining eligibility. The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. Plans established before December 29, 2022 are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), church plans, and governmental plans.
Unlike the other automatic enrollment arrangements, QACA plans have a required employer contribution. You must make at least either:
- A 100% matching contribution of salary deferrals up to the first 1% of compensation, plus a 50% matching contribution on the next 5% of compensation deferred; or
- A non-elective contribution equal to 3% of compensation to all eligible participants.
Employer contributions must be fully vested by the time an employee has completed two years of service.
The participant generally must receive the initial notice at least 30 days, but not more than 90 days, before eligibility to participate in the plan or the first investment. Subject to certain conditions, you may provide the notice to an employee and enroll them in the plan on the first day of work. An annual notice must be provided to participants and all eligible employees at least 30 days, but not more than 90 days, before the beginning of each subsequent plan year.
Sample Notice - https://www.irs.gov/pub/irs-tege/sample_notice.pdf