What it means
Many workers never get round to joining a retirement plan, even when one is offered. A QACA tackles that by making enrolment the default.
Employees can still choose to leave or change their rate, but inertia now works in favour of saving. The plan must set a default contribution rate that starts at a minimum level and rises gradually in later years up to a defined ceiling.
These limits are set by law, and they apply to employees who have not made their own choice. Staff who opt out or choose another rate are treated according to their choice.
The employer must provide either a matching contribution or a fixed contribution for all eligible employees. A common match formula is 100% of the first 1% of pay deferred plus 50% of the next 5%, which totals 3.5% of pay for someone who saves 6%.
The alternative is a flat contribution of 3% of pay for everyone, whether or not they save. In exchange, a QACA plan is treated as meeting certain nondiscrimination tests, which normally check that highly paid staff do not benefit disproportionately.
Passing those tests automatically saves administrative cost and reduces the risk of returning contributions to higher earners. Employer contributions may vest, meaning belong fully to the employee, after a limited period of service, which is shorter than many ordinary plans.
Employers should weigh the extra cost of the mandatory contribution against the benefits of higher participation, lower testing risk and a more engaged workforce. Details such as vesting schedules and notice deadlines are set by regulation and should be confirmed with a plan adviser.
Communication is the final ingredient. Employees must receive a clear notice before each plan year explaining the default rate, their right to opt out and how contributions are invested.
Plans that explain the benefit in plain language tend to see fewer opt-outs and fewer complaints.
In practice
Real-world examples.
Example
A 120-person engineering firm struggles to get staff to join its 401(k). It adopts a QACA, enrols everyone at a 3% default rate, and participation rises to nearly the entire workforce.
Example
A regional retailer with high staff turnover chooses the flat 3% employer contribution option. Even part-time employees who do not defer anything receive the contribution once eligible, which helps the retailer attract staff.
Example
A small accounting practice used to fail its annual plan testing because partners contributed far more than clerks. After moving to a QACA it is treated as passing those tests, and the practice saves several hours of administrator time each year.
Formula
Calculation
Employer match = 100% x (first 1% of pay deferred) + 50% x (next 5% of pay deferred)
Maximum match = 1% + 2.5% = 3.5% of pay
Suppose an employee earns $60,000 and defers 6% of pay, which is $3,600. The employer matches 100% of the first 1%, which is 60,000 x 0.01 = $600. The employer matches 50% of the next 5%, which is 0.50 x (60,000 x 0.05) = 0.50 x 3,000 = $1,500. The total employer match is 600 + 1,500 = $2,100, which equals 3.5% of $60,000.Case study
Seen in the real world.
Ashbrook Marketing is an illustrative, fictional agency with 80 employees, where only 45 were contributing to the company 401(k). The finance manager disliked returning excess contributions to the senior staff every year after failing the plan tests.
She proposed a QACA with an automatic starting rate of 3% and the standard matching formula. The expected extra cost was around 2.5% of the pay of staff who stayed in, which she estimated at about $80,000 a year on the illustrative payroll.
In the first year, participation rose to 74 of 80 staff and the plan was treated as passing its tests. The board concluded that the added cost bought a stronger benefit, less administration and better retention, though it kept the matter under annual review. She also arranged a short briefing for staff so that the default rate and the employer match were explained in plain language.
Watch out
Common mistakes.
- Assuming employees cannot leave, when they have the right to opt out or choose a different savings rate.
- Ignoring the employer cost, which is a firm commitment to contribute through a match or a flat percentage.
- Forgetting the annual notice, which must be sent to employees within the time set by regulation.
Questions
People also ask.
What is the difference between a QACA and an ordinary automatic enrolment plan?
A QACA has fixed rules on default rates and employer contributions in exchange for relief from certain tests, while an ordinary plan may set its own terms but still face the tests.
How much must the employer contribute?
Either a match, commonly 100% of the first 1% and 50% of the next 5% of pay, or a flat 3% of pay for eligible staff.
Do the employer contributions vest immediately?
Not necessarily, as a limited service period can apply, and the maximum length is set by law.
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