What does it take to be a QACA?
“Does the IRS have specific requirements that apply to an automatic escalation feature in a qualified automatic contribution arrangement (QACA) 401(k)?
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
Highlights of discussion
- Yes, in addition to other requirements for a QACA, the auto-enrollment and escalation features in a QACA must satisfy a minimum and maximum amount related to the percentage of compensation (“default percentage”) that, in the absence of an affirmative election, is automatically deducted from employees’ wages and contributed to the plan as elective contributions [Internal Revenue Code Section (IRC §) 401(k)(13)(C)(iii)].
- Under Treasury Regulation 1.401(k)-3(j)(2), in general, a default contribution percentage is a qualified percentage only if it is “uniform” for all eligible employees, does not exceed 10%, and satisfies certain minimum percentage requirements. The default percentage must be at least
- 3% during the “initial period;”
- 4% during the first plan year following the initial period;
- 5% during the second plan year following the initial period;
- 6% during the third and subsequent plan years following the initial period.
- The initial period is the date an employee is first covered by the QACA through the end of the following plan year. For example, if an employee is eligible under the QACA on 02/01/17, the initial period may run through 12/31/18
- A uniform percentage, generally, means that the default percentage must be the same for every employee with the same number of years or portions of years since the beginning of the employee’s initial period. The percentage can vary to accommodate certain statutory restrictions, however. For example, the default election is not applied during the period an employee is not permitted to make elective contributions because of a six-month suspension following a hardship withdrawal under Treas. Reg. 1.401(k)-3(c)(6)(v)(B). (Please see Part 4 Examining Process Section 184.108.40.206.3 of the IRS’ Manual for further details and exceptions.)
- A plan could avoid these automatic increases in the default percentage, often referred to as an “escalator,” by having just one default percentage of between 6 and 10% of compensation.
- The IRS provides further clarification of QACAs in Revenue Rulings 2009-30. Plan sponsors must be aware that the auto-enrollment and escalation features in a QACA must satisfy minimum and maximum contribution percentage requirements.
Plan sponsors must be aware that the auto-enrollment and escalation features in a QACA must satisfy minimum and maximum contribution percentage requirements.