Key Takeaways
Small business owners should weigh the pros and cons of automatic enrollment for retirement plans.
Whether you’re launching a new plan or updating a current plan, it’s wise to take a look at your options.
Here’s what you need to know about QACA plans—and if they make sense for your business.
Automatic enrollment is an increasingly popular option for small businesses and start-ups looking to simplify retirement planning. It can help encourage employees to save for retirement by requiring them to opt out of plan contributions. In other words, it makes saving the default. Designed to help increase plan participation, auto-enrollment also provides tax incentives for many businesses, among other benefits.
Whether you’re launching a new retirement plan or considering updating your company’s current plan, it’s worthwhile to take a look at expanded automatic enrollment options.
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Getting qualified: What you should know about QACAs
A Qualified Automatic Contribution Agreement (QACA) is an auto-enrollment 401(k) plan with safe harbor provisions that exempt plans from year-end compliance testing requirements. There is a specific combination of safe harbor required contributions and auto-enrollment requirements that make a plan a QACA plan.
Unlike other safe harbor designs, a QACA plan is permitted to use a two-year cliff vesting schedule for employer safe harbor contributions. Some employers are willing to jump through the additional design hurdles to take advantage of this two-year vesting schedule.
QACA requirements
To be a QACA, the plan must include an automatic contribution arrangements (ACA) provision using the following limits:
The ACA percentage for the initial period of plan participation must be a minimum of 3%, but can be set at any percentage up to 10%.
If the ACA percentage is set at 6%, no annual escalation is required.
Note: SECURE Act 2.0 requires ACA in new plans started after 12/29/22, beginning with the 2025 plan year (meaning any plan set up with an effective date after 12/29/2022 must add auto-enroll no later than 1/1/2025 (for calendar year plans). Automatic contributions must be at least 3% and may be up to 10% of employee compensation. Contribution rates must increase by 1% each year until at least 10% is reached, but not more than 15%.
If the ACA percentage is set at less than 6%, the percentage must increase automatically each plan year after the initial period by a minimum of 1% until 6% is reached. The plan may continue automatic increases up to 15% of compensation.
If the ACA percentage for the initial period of plan participation is 10%, no additional automatic increases are permitted.
To be a QACA, the employer must make a QACA match or a QACA nonelective contribution:
QACA basic match: Company matches 100% on the first 1% of deferred compensation plus a 50% match on the next 5% of deferred compensation (effectively 3.5% for an employee contributing 6% of compensation).
QACA enhanced match: Company match that’s at least as generous as the QACA basic match at each tier of the match formula.
QACA non-elective: Company contributes 3% or more of each employee's compensation, regardless of whether the employee also makes elective deferrals.
Additionally, any employee can update contribution amounts or choose to opt-out. Likewise, employers can make further contributions and update contribution amounts annually.
Pros and cons of a QACA
As with any other plan option, there are pluses and minuses to consider before implementation.
In the positive column, QACAs:
Bolster participation in your retirement plan while helping employees increase their retirement savings, which can help enhance overall job satisfaction and employee retention.
Create a safe harbor plan, which means you’ll avoid nondiscrimination testing.
Deliver notable tax advantages for those subject to corporate tax (including the deduction of employer contributions).
Simplify the contributions process and investment options for retirement—a system that can be overwhelming for many.
On the other hand, there are downsides to consider:
When employee participation in a plan increases, so does the cost of matching contributions, so it’s wise to examine projected costs ahead of launching a QACA.
While auto-enrollment can be simpler in the long run, it will require new communication materials when you add it as well as more work for the payroll team initially; depending on the size of your business, this may be a notable burden.
Employees may be confused by the default rate and whether that amount is the right contribution for them; they may also think this amount will lead to ample retirement savings when it may only supply a fraction of their long-term needs.
Small businesses and start-ups can manage the last issue through automatic escalation, which is also typically established as an opt-out option. This process automatically increases the percentage employees invest in their retirement plan each year, encouraging more savings up to 10% of their pretax earnings. Employees can always opt-out if they need to dedicate the funds elsewhere. This escalation process provides an alternative to QACA and does not require an employer contribution.
Similar but different: QACA vs. EACA
Not to be confused with QACA, and eligible automatic contribution agreements (EACAs) were created by the Pension Protection Act of 2006 to expand worker participation in retirement plans. An EACA plan is designed to allow penalty-free returns of deferrals within 90 days of automatic enrollment if requested by the employee. Strict timing and notice requirements apply. An EACA design does not require automatic escalation or employer contributions and can be used with a traditional 401(k) design. An EACA can also be combined with a QACA design if the requirements of both EACA and QACA are met.
Adopting auto-enrollment in your small business or start-up
If you decide to move forward with auto-enrollment, you’ll need to determine whether to use a professional institution or establish the plan yourself. Regardless, you will need to:
Create and adopt a written plan, which explains and establishes the foundation of your plan.
Establish a trust for the assets of the plan to ensure they are used solely for participants and beneficiaries.
Initiate a recordkeeping system to track contributions, earnings/losses, expenses, and more.
Share information with employees.
The QACA should explain the enrollment process and the automated aspect as well as the right of employees to abstain from enrollment. The agreement must list the deferral percentage and the right to update that amount. QACAs must be launched at the beginning of a plan year, and companies must create a plan amendment if they choose to add this feature to a current plan.
Unsure what direction to take with your company’s retirement plan? Compare your options using the IRS Tax Information for Retirement Plans information. Retirement plans help individuals and businesses save and plan for the future. Auto-enrollment may help simplify this process, encourage stronger savings, and foster employee loyalty. If you’re considering updating your retirement plan offerings, talk with your plan advisor, attorney, or accountant to determine if a QACA and auto-enrollment are right for you.
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The Human Interest TeamWe believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.
