As part of the Pension Protection Act of 2006 (PPA), to encourage enrollment in 401(k) plans through automatic enrollment of employees by salary reduction, beginning January 1, 2008, there are safe harbor provisions for a Qualified Automatic Contribution Arrangement (QACA) that allow plan sponsors to be exempt from nondiscrimination tests and top-heavy minimum contributions.
Employers must notify employees about (1) their right to opt out of the plan, (2) to change their deferral amounts and investment allocations and what the default investment will be if they fail to do so. Employees automatically enrolled may revoke the enrollment within the first 90 days and receive a refund of deferred amounts as current taxable compensation without the 10% early distribution penalty excise tax.
Notice must be given between 30 and 90 days before the start of the plan year in which the automatic enrollment takes effect. The IRS published a sample notice.
New employees must automatically be enrolled in the plan subject to the right to withdraw or to elect not to participate. Employers can decide whether current employees who are not contributing into the plan will be subject to automatic enrollment.
The first automatic deferral must be set at a minimum of 3% to 10% of pay and must escalate at a rate of at least 1% per year so that the employee is deferring at least 6% after the third year.
Employers must make either a matching contribution of 100% of the non-highly compensated employees’ contributions up to 1% of pay and 50% of non-highly compensated employees’ contributions over 1% but not exceeding 6% of pay (total 3.5% exposure). Employers can match highly compensated employees at the same or lower level. Contributions in excess of 6% may not be matched. Alternatively, employers can provide a non-elective company contribution of at least 3% of pay for non-highly compensated employees. Contributions must be vested after not more than two years of service. Employer QACA contributions are not distributable until termination of employment, death or disability.
Automatic contribution arrangements that do not satisfy these requirements may continue subject to annual nondiscrimination testing and top-heavy minimum requirements.
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