Eligible Automatic Contribution Arrangements (EACAs)

Eligible automatic contribution arrangements (EACAs) establish a default percentage of an employee’s pay to be automatically contributed to a retirement account. EACAs apply when employees do not provide explicit instructions regarding pretax contributions to a qualified retirement account provided by an employer.

Eligible automatic contribution arrangements were created as part of the Pension Protection Act of 2006 (PPA) to encourage more worker participation in self-funded defined-contribution retirement plans. Before the creation of automatic contribution arrangements (ACAs), employees typically needed to make an affirmative choice to contribute a certain percentage of their pretax earnings to an employer-provided retirement plan. ACAs provide increased legal protection for employers to create a new default state in which employees who take no action with regard to their employer-provided plans make payments at a rate established by the plan. In theory, this raises participation rates in retirement plans by forcing employees who do not wish to participate to make an affirmative choice to opt out of the plan.

Suppose an employee joins a firm and ignores the pile of human resources paperwork on retirement plans. If the firm uses an EACA, the employee will eventually receive a paycheck with pretax earnings contributed to their retirement fund as outlined by the program. If the employee decides not to participate or decides to increase or decrease the percentage of contributions, they would have to explicitly decline to participate or fill out paperwork to increase or decrease the percentage of pay going into the plan. Based upon the plan’s rules, the employee might then be able to recoup any automatic contributions made within 90 days of the withdrawal.

The PPA defines two different choices for employers seeking to add an automatic contribution arrangement. EACAs have simpler requirements than the other alternative, qualified automatic contribution arrangements (QACAs). Under an EACA, participants automatically contribute a specific, uniform percentage of their gross pay to a qualified investment plan provided by the employer. Employers using an EACA must treat all employees who do not provide any explicit enrollment instructions the same, enrolling them in the same plan at the same contribution rate. Employers also must provide their employees with adequate notice and information about the plan, as well as their contribution and withdrawal rights. Some plans provide employees with a grace period during which they can withdraw their automatic contributions without penalty if they decide not to participate.

QACAs provide employers safe harbor provisions exempting them from actual deferral percentage and actual contribution percentage (ADP/ACP) testing that other plans must undergo to ensure they do not discriminate against lower-paid employees. In return, employers must make matching contributions as required by the IRS and must vest matching and non-elective contributions within two years. The default deferred contribution for a QACA must also increase annually from at least 3% the first year to at least 6%, with a maximum of 10% in any year.