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General discussion of safe harbor contributions and qualified automatic contribution arrangements (QACA)

Traditional Safe Harbor

A traditional safe harbor is a plan that is designed to pass the Actual Contribution Test without the need for numeric testing.  There are three types of safe harbor contributions that can be made to a traditional safe harbor plan:

  • A 3% safe harbor non-matching contribution.
  • A basic safe harbor match of 100% up to 3% of compensation and 50% of the next 2% of compensation.
  • An enhanced safe harbor match formula. The enhanced safe harbor match must meet the following requirements: It must be at least as generous as the basic match; deferrals in excess of 6% of compensation may not be matched if the plan is to satisfy the Actual Contribution Percentage test safe harbor; the rate of match may not increase as deferrals increase; and the rate of the match may not be greater for HCEs than for NHCEs.

In general, a safe harbor plan must satisfy the following contribution requirements:

  • The plan must use a non-discriminatory definition of compensation upon which to base safe harbor contributions (essentially, this definition is W-2 compensation);
  • The plan must provide for 100% vesting of the safe harbor contributions (but not for the “other” matching contributions), i.e., matching contributions used to satisfy the Actual Contribution Percentage Test;
  • The plan must provide that the safe harbor contributions may not be withdrawn before age 59½, even for hardship (but not for “other” matching contributions, i.e., matching contributions used to satisfy the Actual Contribution Percentage Test); and
  • The plan may not apply any allocation conditions to safe harbor contributions (e.g., last day of employment requirement, 500 hours in the year requirement, etc.).

To satisfy the safe harbor contribution notice requirements, the employer must provide timely written notice to all eligible employees before the beginning of each plan year. In general, the notice must be “accurate and comprehensive.” The content of the notice must specify the items described below and must be written in a manner understandable by the average plan participant:

At a minimum, the notice must contain a description of the following:

  • The safe harbor contribution formula used by the employer to satisfy the safe harbor contribution requirements;
  • Any other contributions provided under the plan and any conditions for receiving those contributions;
  • The plan receiving the safe harbor contributions if those contributions are not made to the same plan as other contributions;
  • The definition of compensation used for deferrals;
  • The conditions for making tax-sheltered contributions;
  • The withdrawal and vesting provisions applicable to plan contributions; and
  • Instructions concerning where the participant can receive additional information about the plan.

Contact GuideStone if you are unsure of whether your plan is a safe harbor matching plan or if you are interested in more information on how to design a safe harbor matching plan for your employees.

Below are links to sample notices that employers may use to help develop their own notices for their safe harbor contributions. These notices are provided for convenience only and have not been approved by the IRS. They do not take into account the specific provisions of your plan. Certain phrases have been inserted in brackets to indicate they are likely to need customization. Employers should consult their legal counsel regarding their safe harbor notices.

Qualified Automatic Contribution Arrangement (QACA)

A Qualified Automatic Contribution Arrangement (QACA) is another safe harbor plan design that incorporates automatic enrollment feature into the plan. Plan sponsors that comply with the QACA safe harbor rules and certain additional conditions will be deemed to satisfy the ACP nondiscrimination requirements. Generally, the QACA safe harbor rules require the following:

Effective date. Unless this is the first Plan Year, a QACA must become effective on the first day of the Plan Year.

Employees subject to the automatic enrollment. A QACA must apply the automatic contribution rate, which is specified in the plan, to new employees and current employees who have not made an affirmative election to participate or not participate in the plan.

Note: Current employees who have not completed a retirement contribution agreement are treated as NOT having made an affirmative election. An election not to defer (e.g., specifically opting out of the plan by electing a 0% deferral rate on a retirement contribution agreement) is an affirmative election.

Notice of plan features and ability to opt out. Employers must provide employees with a notice describing the QACA features and the ability to opt out of the plan or to modify the automatic contribution rate.

Automatic contribution rates. A QACA must provide a certain automatic contribution rate for employees who do not have an affirmative salary deferral election in place. Generally, the automatic contribution rate must be a uniform percentage of compensation, cannot exceed 10% and must satisfy the following minimum percentages:

  • Initial period — the minimum percentage is 3% of compensation.  The initial period begins on the day the employee first participates in the QACA and ends on the last day of the following plan year.
  • Second year — the minimum percentage is 4% of compensation.
  • Third year — the minimum percentage is 5% of compensation.
  • Fourth year — the minimum percentage is 6% of compensation.

Note:  Because changing automatic contribution rates each year can become an administrative burden, some plan sponsors are setting the rate initially at 6% for all participants who are automatically enrolled.

Safe harbor employer contributions. The QACA must provide for either a safe harbor matching contribution or a safe harbor employer contribution.

  • Safe harbor matching contribution — 100% of elective contributions up to 1% of compensation and 50% of elective contributions between 1% and 6% of compensation.
  • Safe harbor employer contribution — 3% of compensation for all employees eligible for the plan. 

Note: Some plan sponsors are designing their QACAs to provide an enhanced safe harbor match of 100% of elective contributions up to 3½% of compensation to eliminate the tiered match approach.  Note that the safe harbor match for a QACA differs from the match for a safe harbor 401(k) plan which is 100% on elective contributions up to 3% of compensation and 50% on elective contributions between 3% and 5% (or 100% match on elective contributions up to 4% of elective contributions under the enhanced match approach). However, even though the enhanced QACA safe harbor match results in a lower matching percentage, the increased participation generated by the automatic enrollment provisions will in many cases result in a greater cost to the employer.

Vesting of safe harbor employer contributions. The safe harbor matching contributions and the safe harbor employer contributions must be fully vested after two years of vesting service. 

Note: The vesting requirements for a QACA are slower than the vesting requirements for a safe harbor 401(k) plan, which requires immediate vesting of employer safe harbor contributions.

In order to receive status as a QACA, a plan must provide a notice to eligible employees regarding the features of the plan including information on contributions, vesting and withdrawals.

Timing of notice. Plan sponsors that wish to implement a QACA must provide notice to participants so that they have a “reasonable period of time after receipt of the notice” before the plan sponsor withholds automatic elective contributions to the plan.  The reasonable time requirement is satisfied if the employer provides the notice at least 30 days and no more than 90 days before the beginning of the plan year.

Content of notice. The content requirements for a QACA notice are similar to those for safe harbor plan in that they must be plan specific. In addition, the notice must provide information on the automatic enrollment features of the plan, including the automatic contribution rate, the right of the employee to elect a different rate or to opt out of the plan, how the plan will invest automatic contributions in the absence of an affirmative election and, if applicable, the 90-day right to withdraw automatic contributions.

Contact your Relationship Manager at GuideStone if you would like examples of QACA notices. Consult with your legal counsel regarding any safe harbor or automatic enrollment notices.