QACA – The Other Safe Harbor Plan
With the retirement plan changes initiated by the recently passed SECURE Act 2.0, a plan design type that has been little used in the past is now getting a lot more attention. The Qualified Automatic Contribution Arrangement plan, or QACA, will become more common as new plans established after December 29, 2022 will be required to have an automatic enrollment provision by January 1, 2025.
A prominent design feature for many 401(k) plans is a safe harbor provision that ensures owners or highly compensated employees can contribute the maximum allowed by the IRS from their own compensation. These limits for 2024 are $23,000 for those employees under 50 years of age and $30,500 for those 50 years and over. Having a safe harbor provision where the plan sponsor commits in advance to either a match or flat contribution, known as a non-elective contribution, allows them to take advantage of the safe harbor. A traditional safe harbor plan has a match of up to 4% of employee compensation when the employee contributes up to 5% of their own compensation and conversely the sponsor can do a flat contribution, or non-elective, of 3% of employee compensation to all eligible employees. The sponsor must choose one of these two regimes to be a traditional safe harbor plan. All safe harbor contributions are 100% vested when received by the employees, meaning if they leave from your organization soon after receiving this contribution, they get to take 100% of their contribution with them.
All of this brings us back to the QACA. This is essentially a safe harbor plan with a twist. The big difference between the QACA and the traditional safe harbor plan is that it has an automatic enrollment feature. Otherwise, the two plan types are very similar. The automatic enrollment feature creates slightly more monitoring of employee eligibility so that employees are automatically enrolled when they don’t make an employee deferral election. By having the automatic enrollment, the safe harbor match is reduced from 4% to 3.5%. The safe harbor nonelective remains 3% in the QACA, similar to the traditional safe harbor plan. By having a QACA plan, the safe harbor contributions can be subject to a two year cliff vesting schedule. Another required feature is that employees who are auto-enrolled will have auto escalation of the employee deferrals. The auto enrollment deferral rate starts at 3% of pre-tax compensation and will increase each year by 1% on the enrollment anniversary date until the participant reaches 10% of their compensation. Employees can always opt out of the automatic deferral percentage which will also stop the auto escalation.
A big factor in retirement readiness for employees is just getting them started. The QACA plan structure will get many employees auto-enrolled to start their retirement savings. When employees do get started, they are able to see take home pay isn’t impacted as much as they thought it might be and they see the benefit of an employer contribution. The company benefits from a lower required match, if this is the option selected, and has the employee retention power of a two year cliff vesting of those safe harbor contributions.
With the creation of SECURE Act 2.0, the automatic enrollment requirement for new plans is now part of the required plan design landscape. Plans will have automatic enrollment with a minimum employee deferral rate of 3%. Employees who are auto-enrolled due to not making a deferral election will be auto-escalated by 1% per year up to at least 10%, but not more than 15% of the employee’s compensation. Due to the SECURE Act 2.0 requirement that all new plans effective after December 29, 2022 have automatic enrollment in place as of January 1, 2025, it will benefit plan sponsors with newer plans to convert to a QACA plan so they have the added benefits of a lower safe harbor match cost and two year cliff vesting schedule.
