FAQs - Auto Enrollment - Are there different types of automatic contribution arrangements for retirement plans?
Yes, besides the basic automatic contribution arrangement, a plan sponsor can choose an eligible automatic enrollment arrangement (EACA) or a qualified automatic enrollment arrangement (QACA).
- An EACA 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 (with earnings) 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 an automatic contribution arrangement with special “safe harbor” provisions that exempt a 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 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
- 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 the required employer contributions due to an employee’s financial hardship.