Statistically around 80% of small business 401(k) plans opt for a safe harbor plan design. This choice helps them automatically meet the ADP/ACP tests and avoid nondiscrimination tests conducted by the IRS. Consequently, business owners and highly compensated employees (HCEs) can contribute the maximum allowable amount each year. For 2024, if you are under the age of 50, $23,000 and over 50, $30,500. There are two main types of safe harbor plan designs: traditional and QACA. Today, we will focus specifically on the QACA option.
QACA originated with the Pension Protection Act of 2006, which aimed to increase employee participation in retirement plans. A Qualified Automatic Contribution Arrangement (QACA) safe harbor plan is a type of 401(k) plan that automatically enrolls eligible employees and includes specific safe harbor provisions.
QACA Requirements:
- Automatic enrollment with contributions ranging from 3% to 10%.
- Automatic escalation of contributions, 1% each year, minimum 6%.
- An optional two-year vesting period for employer contributions
- Employer contribution options:
- A 3% non-elective contribution.
- 100% match on the first 1% of deferred compensation and 50% match on deferrals exceeding 1%, up to a maximum of 6% of compensation.
QACA Notable Benefits
- Lower match formula
- 3.5% match instead of 4%
- Automatic enrollment
- Increasing participation
- Automatic escalation
- Increasing retirement readiness
- Optional 2-year vesting
- Encourage employment longevity
QACA Employer Benefits
Since QACA plans require a smaller employer match relative to traditional safe harbor, they can be more cost effective for employers while still qualifying for safe harbor status. Unlike traditional safe harbor plans that mandate immediate vesting, QACA plans permit a vesting schedule, aiding in lower cost and more importantly employee retention.
QACA Employee Benefits
Employees preparing adequately for retirement has consistently been a challenge. Mandating automatic enrollment with automatic escalation should help more employees who might not usually contribute to their 401(k), start saving earlier and more over time.
QCA Notice Requirements
Like other automatic enrollment and safe harbor plans, a QACA plan includes specific notice requirement for employees. These requirements integrate the standard notices for automatic enrollment, safe harbor and automatic escalation.
Conclusion
The SECURE 2.0 Act of 2022 requires new 401(k) plan established on or after December 29th, 2022, must include an automatic enrollment feature starting in 2025, unless a specific exception is applicable. Because of this, QACA safe harbor plan design without a doubt will become more popular. Not only will it increase participation but retirement readiness for employees. Small Businesses looking to start a retirement plan need to consider QACA safe harbor 401(k).