QACA and EACA: Considerations for Plan Sponsors

Determining if a Qualified Automatic Contribution Arrangement or Eligible Automatic Enrollment Arrangement is right for your plan

April 2024

*This document discusses options available for Cash or Deferral Arrangement plans established before the enactment of SECURE 2.0 (December 29,2022) that are not required to have an Eligible Automatic Contribution Arrangement.

There are several factors that plan sponsors should be aware of when considering a QACA (Qualified Automatic Contribution Arrangement) or Eligible Automatic Enrollment Agreement (EACA). While there are benefits for plan sponsors, QACA and EACA arrangements are highly complex due to the specific timing requirements and generally require additional administration. During your review process, it can be extremely helpful to be aware of these complexities before entering into an arrangement.

QACA – Plan Sponsor Considerations

First, it is important to identify your plan’s reasons and goals for choosing QACA. If you are trying to simply pass testing or avoid ADP/ACP testing, there are alternatives including a traditional Safe Harbor plan which may be more cost-effective and may be inherently less risky and/or burdensome to administer. A properly designed Automatic Contribution Arrangement (ACA) may help pass testing without the restrictions of QACA. Furthermore, plans trying to increase participation may not realize that a properly designed ACA arrangement with a sufficient Automatic Enrollment default rate, (and increase program), can help to accomplish the goal of increasing participation. With an ACA arrangement, current match and vesting formulas would not need to be changed and there would be additional flexibility without QACA in terms of covered employees, services such as Plan Sponsor AIP. In either of the above scenarios, a traditional safe harbor design or properly designed ACA arrangement may be a better solution to consider and with less administrative burden, risk, and cost. These solutions can be used individually, or in conjunction with one another.

Alternatives and other options exist to help participants prepare for retirement.

As mentioned above, a properly designed automatic contribution arrangement (ACA) as well as re-solicitation and Plan Sponsor AIP are all possible options that can increase participation, saving rates and overall retirement readiness of participants. Beyond auto solutions, other plan design elements that could also help employees prepare for retirement and result in increased participation rates, savings rates, or both:

  • Review of the matching contribution formula, to ensure that it is not too front-loaded (ex. 100% up to 3%) or stretched too thin (ex. 25 up to 12%). A front-loaded match formula may not foster adequate savings rates. A match formula that is stretched too thin may not sufficiently incent participants to defer. In the examples above, a 50% up to 6% match formula may produce increased participation and/or savings rates.
  • Review the match formula to ensure it is simple to communicate and easy to understand. Tiered formula can be problematic in this regard, especially if the match is being calculated on a period other than a plan year.
  • Evaluate any non-elective contribution. Is it material, and would those resources be better served to enhance a matching contribution?

QACA presents many challenges which if not met, could jeopardize the safe harbor status that is being sought and present plan sponsors with additional risk. We strongly recommend discussing these complexities with your Fidelity Managing Director. All involved with the QACA should be familiar with all of the requirements to ensure regulatory requirements are satisfied.

Here are a few of the challenges that QACA presents:

  1. QACA Safe Harbor Notices are the responsibility of the Plan Sponsor for Fidelity clients.
  2. The match cost in total dollars can be substantially higher due to QACA requiring automatic enrollment. The opt out rate for automatic enrollment is typically 15% or less if the automatic enrollment rate is between 1% and 6%. Automatic enrollment would be optional for traditional safe harbor.
  3. QACA has a uniformity requirement for the automatic enrollment service and employer sponsored increase program. This means a change to these services need to be applied to both new hires/rehires going forward along with existing employees that did not opt out of these services. Traditional safe harbor does not have this uniformity requirement for these services.
  4. If a change to the automatic enrollment service or employer sponsored increase program is desired, these changes need to be made in manner to allow the changes to impact the first payroll period of the plan year under QACA. QACA requires the plan document to be amended on the first day of the plan year in most circumstances. Traditional safe harbor can be amended mid-year for changes to these services.
  5. QACA requires the payroll deductions related to automatic enrollment to begin the earlier of the second payroll after providing the employee notice or 30 days. To ensure timely delivery of the automatic enrollment notices and immediate start of payroll deductions, plan sponsors will need to ensure entry of new hires is made in a timely manner in their new recordkeeping system. Also, plans without a service requirement will need a shorter opt out period for the automatic enrollment service under QACA in order to meet this requirement.
  6. Vesting is based on date of hire on Fidelity’s Preapproved Plan Document. If the average tenure of the employees is 3 years and the employer has low turnover during employees’ first 2 years of employment, the vesting schedule under QACA may not offer much of a benefit in relation to the 100% immediate vesting schedule for traditional safe harbor.
  7. QACA has a requirement that an employee cannot be automatically enrolled/increased to a deferral rate of 10% (or higher) during the first year of participation in the plan. For example, the following combinations are problematic for the Automatic Enrollment/Employer Sponsored Increase Programs:

                            a. An initial AE rate of 10% to 15% with or without an annual increase 

                            b. An initial AE rate of 9% and a 1% annual increase rate 

                            c. An initial AE rate of 8% and a 2% annual increase rate

                            d. An initial AE rate of 7% and a 3% annual increase rate

EACA – Plan Sponsor Considerations

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. There are two primary benefits of being an EACA: 

  • Unwind Withdrawal: The Unwind provision is a plan design option that allows employees who were automatically enrolled into the plan the ability to withdrawal automatic enrollment contributions (with earnings). Any corresponding matching contributions would be forfeited. A plan must become an EACA if they want to offer the unwind withdrawal. The unwind option must be elected by the participant within 90 days of the date which the first AE contribution was deposited from the participant’s account. 
  • Extension for ADP/ACP returns of excess: The EACA qualification provides up to 6 months to correct failed ADP/ACP test before the 10% sponsor excise tax applies instead of the usual 2 1/2 months after the end of the plan year. Important to note that an EACA plan is not exempt from ADP/ACP non-discrimination testing like a QACA. It only provides for an extension on ADP/ACP returns of excess. 

We encourage plan sponsors to carefully consider adding an EACA provision. Often clients do not find that the benefits warrant adding this provision - especially when considering auto solutions uniformity requirements, notice requirements and other potential considerations. We encourage plan sponsors to reach out to their Fidelity Managing Director to discuss the benefits, considerations, and implications of QACA and EACA.

Fidelity does not provide legal or tax advice, and the information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation.

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Fidelity Investments Institutional Operations Company LLC.