Qualified Automatic Contribution Arrangements (QACAs)

Also known as QACAs, Qualified Automatic Contribution Arrangements were established under the Pension Protection Act of 2006 as a way to increase workers' participation in self-funded defined contribution retirement plans such as 401(k)s, 403(b)s and the deferred compensation 457(b)s. Beginning January 1, 2008, companies that use QACAs automatically enroll workers in the plans at a negative deferral rate, unless they specifically opt-out.

In March 2018 under a QACA, an employer must do one of the following:

1. Contribute 100% of an employee’s contribution up to 1% of his or her compensation, along with a 50% matching contribution for the employee’s contributions above 1% (and up to 6%).
2. Deliver a nonelective contribution of 3% of compensation to all participants.

Employer contributions can be subject to a two-year vesting period unlike traditional 401(k)s, in which employer contributions are immediately vested. Employees must be given adequate notification about the QACA, as well as the ability to opt out completely or to participate at a different, specific contribution level.

QACAs also have “safe harbor” provisions that exempt a 401(k) plan from nondiscrimination testing requirements for annual actual deferral percentage (ADP) and actual contribution percentage (ACP). A QACA also may not distribute the required employer contributions due to an employee’s financial hardship.

In addition to QACAs, employers may offer employees a range of retirement options such as 401(k)s, 403(b)s and 457(b)s. A 401(k) plan is a qualified employer-established plan (i.e. it meets Internal Revenue Code Section 401(a) requirements of and is thus eligible to receive certain tax benefits).

Employees that are eligible for a 401(k) plan may make salary deferral contributions on a post-tax and/or pretax basis. In turn, employers may make matching or non-elective contributions to an employee’s 401(k) plan and may also add a profit-sharing feature. Earnings in a 401(k) plan accrue on a tax-deferred basis.

A 403(b) plan is specific to employees of public schools, tax-exempt organizations, and ministers. These plans generally invest in annuities and/or mutual funds. A 403(b) plan is also another name for a tax-sheltered annuity plan.

Finally, a 457 plan is a non-qualified, tax-advantaged deferred compensation retirement plan, in which employees are allowed to make salary deferral contributions. As with 401(k)s, earnings in a 457 plan grow on a tax-deferred basis, and contributions are not taxed until the assets are distributed.