July 13, 2011

For some reason, I’ve had several plan sponsors and advisers ask about traditional 401(k) Safe Harbor plans compared with Safe Harbor plans that also incorporate auto-enrollment and auto-escalation (Qualified Automatic Contribution Arrangements – QACA.)

The interest makes sense because the changes to plans, to incorporate either one of these programs, would need to be researched and planned well in advance. Actual changes occur at the beginning of the plan year, and advance notice needs to be provided to all eligible employees.

So this week, for your reference, I thought I’d provide a quick summary of the differences between the two programs in case you’re having the same conversations.

  401(k) Safe Harbor QACA Safe Harbor
Automatic Deferrals None Minimum 3% in year 1

Minimum 4% in year 2

Minimum 5% in year 3

Minimum 6% in year 4

(Maximum 10% )

Employee can opt-out of default deferral rate

Automatic Increases None Required each year until deferral rate reaches at least 6%

Employee can opt-out of default increase rate

Employer Contributions Basic Match – 100% Match on first 3%, 50% on next 2%;  OR

 

Enhanced Match – Must equal or exceed Basic Match at any level of deferral (e.g. 100% match on deferrals that do not exceed 4% of compensation;  OR

 

Non-Elective Contribution – At least 3% contribution to all eligible employees

Basic Match – 100% on fist 1%, 50% on next 5%;  OR

Enhanced Match – Must equal or exceed Basic Match at any level of deferral (e.g. 100% match on deferrals that do not exceed 4% of compensation;  OR

Non-Elective Contribution – At least 3% contribution to all eligible employees

Vesting Immediate 100% vesting After 2 years of service 100% vesting
Testing Generally deemed to pass ADP/ACP and top heavy tests. Generally deemed to pass ADP/ACP and top heavy tests.

 

Scott Swezy
Vice President, Smart401k