FAQs - Auto Enrollment - Are there different types of automatic contribution arrangements for retirement plans?
Yes, besides the basic automatic contribution arrangement, which has been available for quite some time, recent legislation introduced two new types of automatic contribution arrangements: an eligible automatic enrollment arrangement (EACA); and a qualified automatic enrollment arrangement (QACA). An EACA can also be a QACA.
- An EACA, available for plan years beginning after 2007, is a type of automatic contribution arrangement that must uniformly apply the plan’s default percentage to all employees after providing them with a required notice. It may allow employees to withdraw automatic enrollment contributions (and earnings thereon) by making a withdrawal election as required by the terms of the plan (no earlier than 30 days or later than 90 days after the employee’s first automatic enrollment contribution was withheld from the employee’s wages). Employees are 100% vested in their automatic enrollment contributions.
- A QACA is available for 401(k) plans for years beginning after 2007. It is an automatic contribution arrangement with special “safe harbor” provisions that exempt the 401(k) plan from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination testing requirements. A QACA must specify a schedule of uniform minimum default percentages starting at 3% and gradually increasing with each year that an employee participates. Under a QACA, an employer must make a minimum of either:
a) a matching contribution of 100% of an employee’s contribution up to 1% of compensation, and a 50% matching contribution for the employee’s contributions above 1% of compensation and up to 6% of compensation; or
b) a nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute any amount to the plan.
Under a QACA, employees must be 100% vested in the employer’s matching or nonelective contributions after no more than 2 years of service. A QACA may not distribute any employer contributions listed in a) and b) due to an employee’s financial hardship.