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New "QACA" Option for 401(k) Enrollment Can Eliminate Discrimination and Top Heavy Testing

As of January 1, 2008, 401(k) plans can begin to offer an alternative enrollment method which can eliminate the need for top heavy and discrimination testing.  Called a "Qualified Automatic Contribution Arrangement" (QACA), it requires certain minimum levels of deferrals.  Here's how it works:

·         all employees eligible to participate in the 401(k) plan must be covered except employees who either elect not to participate or elect to participate at a different contribution rate.

·         the minimum automatic employee deferral percentage is 3% of compensation for the first and second years the employee is covered by the QACA, increasing by 1% each year thereafter to 4% in the third year, 5% in the fourth year and 6% for each year thereafter. The automatic contribution percentage cannot exceed 10% of compensation at any time.

·         It requires a minimum level of employer contribution – either a matching contribution or a non-elective contribution

·         employer contributions can be subject to a two year vesting requirement.

·         a QACA must provide employees with a notice that explains the automatic enrollment provisions and the employee's right to elect not to participate in the arrangement or to participate at a different level.

·         an employee can elect out of automatic contributions after they have begun and can withdraw contributions made under an automatic enrollment arrangement provided the withdrawal occurs within 90 days after the first automatic employee contribution is made. This permissible withdrawal is not subject to the 10% early distribution penalty tax.

OK, I'm not sure how you are supposed to pronounce "QACA" yet, but this article from Fisher & Phillips has a more comprehensive explanation of what it's all about.

Full post as published by Strategic HR Lawyer on October 09, 2007 (boomark / email).