Qualified Automatic Contribution Arrangement (QACA)
Rev. 06/22/07, E-mail Alert 2007-8

Click here for updated information based on the Automatic Enrollment Final Regs, which were issued February 24, 2009.

This article updated by the article on the Automatic Contribution Proposed Rules Nov. 2007

Automatic Enrollment Safe Harbor 401(k) Starting in 2008
The Pension Protection Act (PPA) provides new incentives for implementing automatic enrollment in 401(k) plans on or after January 1, 2008. Perhaps the most interesting provision is a new safe harbor automatic enrollment program known as a “qualified automatic contribution arrangement” or QACA. Among the advantages of a QACA is its exemption from nondiscrimination testing and top heavy testing. The QACA rules apply to plan years beginning on or after January 1, 2008.

Safe Harbor Rules
The following are the requirements for establishing a QACA. Note that a key advantage of a QACA is that its required matching contribution is less expensive than a 401(k) safe harbor plan's matching contribution.

• Minimum Deferral Percentages. A QACA must have a minimum specified automatic contribution percentage. That percentage will escalate in the second, third, and fourth plan years of an employee's participation. The minimum deferral for the first full year of participation is at least 3% (but no more than 10%) of compensation. The minimum increases to 4% the second year, 5% the third year, and 6% the fourth year; the maximum automatic percentage cannot exceed 10%.
  
• Eligibility Exceptions. The automatic enrollment rules apply to all employees eligible to defer — with two exceptions. The first exception is for employees who are already deferring. The second exception is for those who have filed an election not to defer. The employer may choose to include eligible employees who defer less than the plan's minimum amount in the program.
  
• Minimum Contribution Requirements. The plan sponsor must make either a matching contribution of 100% of the first 1% of compensation deferred plus 50% of the next 5% deferred (for a maximum match of 3.5% of compensation on the first 6% deferred) or a nonelective contribution of at least 3% of compensation to all eligible nonhighly compensated employees.
  
• Distributions. The normal 401(k) plan in-service withdrawal restrictions apply to distributions before age 59½.
  
• Vesting. Employer contributions used to satisfy the safe harbor must be 100% vested after an employee has completed no more than two years of service. Note that this is another key advantage of a QACA. For example, in regular 401(k) safe harbor arrangements (i.e. those that are not QACAs) immediate full vesting of safe harbor contributions is mandated.
  
• Notice Requirements. Within a reasonable time before the beginning of each plan year, employees eligible to participate in the QACA must receive written notice of their rights and obligations regarding automatic enrollment. (This notice is not a new concept.) The employee notice must also be provided when an employee is hired (if it is within 30 days of becoming eligible) or just before eligibility requirements are satisfied. The notice must explain the employee's right to decline automatic enrollment or to change his or her election amount, including the right to stop deferrals.

Provisions Affecting All Automatic Enrollment Plans in 2008
90-day Revocation. PPA created this rule to cover situations where employees fail to return their enrollment forms and then complain when contributions are taken out of their pay. The law as proposed originally set a deadline of April 15th of the subsequent year for such amounts to be returned. The deadline did not appear in the final version as enacted. We await IRS guidance on the actual deadline. Note that there has been some speculation that the revocation period may apply to all automatic enrollment arrangements other than QACAs. This would not seem to make sense; so we await the forthcoming quidance for clarification.

Testing Changes. Eligible automatic enrollment arrangements will have six months (rather than 2½ months) after the end of the plan year to perform the ADP/ACP testing and make corrective distributions, if necessary.

Changes for all 401(k) plans for the 2008 plan year
Corrective distributions and the earnings thereon will be taxed in the year distributed rather than the year of contribution. This applies to all plans whether or not automatic enrollment applies.

Distribution of “GAP period” earnings has been eliminated for all plans for ADP and ACP corrective distributions as of the 2008 plan year. WRERA of 2008 eliminated GAP period income on excess deferrals.

DOL to Issue Qualified Default Investment Alternative (QDIA) Final Regulations
The final QDIA regulations will provide safe-harbor criteria for default plan investments for participants who fail to make investment selections. If the default investment meets the DOL criteria to constitute a QDIA, the plan fiduciary will not be liable for any loss that occurs as a result of such investment.

Participants and beneficiaries must be notified of the QDIA 30 days in advance of the first investment in a QDIA and annually at least 30 days before the start of each plan year thereafter. The QDIA rules will become effective 60 days after the final regulation is published in the Federal Register.

Bill Grossman, QPA