A Qualified Automatic Contribution Arrangement (QACA) is a type of 401k plan feature that automatically enrolls employees, helps them build retirement savings over time, and meets certain IRS requirements to avoid annual discrimination testing. It follows a set deferral schedule that typically starts at 3% of pay and increases each year until it reaches at least 6%. To qualify as Safe Harbor, employers must offer required contributions and follow a specific vesting schedule.
For employers, a QACA can simplify plan administration, support compliance, and encourage higher participation. For employees, it offers an easy way to start saving, steady contribution growth, and guaranteed employer matches.
Let’s explore the basics of a QACA, the rules that guide it, and what to consider if you’re thinking about adopting this feature.
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What Is a QACA?
A Qualified Automatic Contribution Arrangement (QACA) is a feature within a 401k plan that automatically enrolls eligible employees at a set contribution rate. It helps employees begin saving without needing to take action themselves. A QACA also meets specific Safe Harbor requirements, which means the plan does not need to complete the IRS nondiscrimination tests for employee and employer contributions.
How It Relates to Safe Harbor 401k Plans
Safe Harbor 401k plans are designed to meet IRS compliance rules by requiring certain employer contributions and vesting schedules. A QACA is one type of Safe Harbor plan under IRC section 401(k)(13). It combines automatic enrollment with required employer contributions and structured vesting. This approach allows the plan to maintain Safe Harbor status without separate Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing.
QACA Basic Eligibility Requirements
To qualify as a QACA, a plan must meet the following criteria:
✅ Be a 401k cash or deferred arrangement that applies the same default contribution rate to all eligible employees.
✅ Set a default deferral rate that begins at a minimum of 3% for the first two years, increases to 4% in the third year, 5% in the fourth year, and at least 6% in the fifth year. The rate cannot be higher than 10% during this initial schedule but may gradually rise to a maximum of 15% after that period.
✅ Offer one of the following employer contribution options:
- A matching contribution of 100% on the first 1% deferred and 50% on the next 5%.
- A nonelective contribution of 3% for all eligible participants.
✅ Fully vest employer contributions after no more than two years of service.
✅ Provide written notice of automatic enrollment to employees 30 to 90 days before each plan year or upon hire.
Main Features and Compliance Rules
A QACA must follow specific standards set by the IRS and Department of Labor to maintain its Safe Harbor status. These rules define how contributions are handled, how employees are enrolled, and what notices employers must provide.
Automatic Enrollment and Contribution Levels
A key feature of a QACA is automatic enrollment. Employees are added to the plan at a preset contribution rate unless they actively choose a different rate or opt out. The default schedule must:
✅ Start at 3% of compensation in the first year.
✅ Increase each year as required by IRS rules so that it reaches at least 6% by the fifth plan year, with the option to raise it up to 15% after the initial schedule.
✅ Allow employees to adjust their deferral rate or opt out at any time through an affirmative election.
Employer Matching Requirements
Employers offering a QACA must commit to one of two required contribution methods:
- Provide a matching contribution equal to 100% of the first 1% deferred, plus 50% of the next 5% deferred (up to a total of 6%).
- Make a nonelective contribution of 3% of compensation to every eligible participant, regardless of whether the employee contributes.
These contributions ensure that employees benefit automatically, which increases plan participation and fairness.
Vesting Schedules
Employer contributions must vest quickly. A QACA must ensure:
✅ Full vesting after no more than two years of service
✅ Or an alternative vesting schedule that does not exceed a two-year limit
IRS Regulations and Annual Notice Obligations
To keep the plan compliant, employers must provide participants with a written notice each year. This notice should:
- Be delivered 30 to 90 days before the plan year begins (or at hire, if applicable)
- Clearly explain the default deferral rate, automatic escalation, employer contribution formula, eligibility rules, and opt-out options
- Give employees enough time to make changes before the first automatic contribution is deducted
📌 Also Read: 401k Nondiscrimination Testing Explained
Pros and Cons for Employers and Employees
A QACA can provide meaningful advantages for both employees and employers, but it also comes with added responsibilities and potential costs. Understanding both sides helps determine if this approach fits an organization’s goals.
Advantages For Employees
✅ Effortless enrollment: Employees begin saving automatically without having to take action, which helps them start building retirement savings sooner.
✅ Steady savings growth: Automatic annual increases raise deferral rates gradually, supporting long-term savings habits.
✅ Guaranteed employer contributions: Each participant receives either a matching or nonelective contribution, which can accelerate account growth.
Advantages For Employers
✅ Safe Harbor compliance: QACA plans meet IRS Safe Harbor rules and do not require annual ADP or ACP testing, reducing administrative work.
✅ Higher participation and retention: Automatic enrollment and required contributions typically encourage more employees to participate and remain engaged with the plan.
✅ Alignment with future regulations: QACAs satisfy the SECURE Act 2.0 requirement for automatic enrollment in new plans starting in 2025.
Potential Drawbacks
❌ Increased employer cost: Required contributions (matching or nonelective) may raise plan expenses, especially as more employees are automatically enrolled and contribution rates increase over time.
❌ Administrative complexity: Managing deferral schedules, employer contributions, vesting timelines, and precise notice delivery requires careful oversight. Mistakes can lead to compliance issues.
❌ Employee resistance: Some workers may not want automatic enrollment or escalating contributions. Human resources teams need to be prepared to handle opt-out requests and deferral changes.
Compliance Considerations
Even with Safe Harbor protection, employers must meet ongoing obligations:
- Annual notices: Send clear, written notices 30 to 90 days before each plan year (or upon hire) explaining default rates, escalation schedules, and opt-out options.
- Plan document updates: Include QACA-specific provisions and Safe Harbor language before the plan year begins.
- Deferral monitoring: Track both default and employee-elected deferral rates to ensure they meet IRS escalation requirements.
- Record-keeping: Maintain documentation and copies of notices for IRS review, even though QACAs are exempt from ADP and ACP testing.
Final Thoughts
QACAs can simplify plan management and encourage higher employee participation through automatic enrollment and required contributions. However, they also come with added responsibilities, such as strict notice requirements and potential increases in employer costs. Weighing these benefits and obligations carefully can help determine whether this approach fits your organization’s goals.
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