How much must an employer contribute to get a QACA safe harbor?

[Peter Gulia]

If a charity’s § 403(b) plan provides a qualified automatic contribution arrangement with auto-escalation, to get coverage and nondiscrimination safe harbors:

how much must the employer provide as a matching contribution?

how much must the employer provide as a nonelective contribution?

[Peter Gulia]

Is it 3.5% for a matching contribution, or 3% for a nonelective contribution?

[ErnieG]

Peter:  Correct 3.5% on the first 6% of deferral for the match.

• Matching contribution of: 100% of an employee's contribution up to 1% of compensation and a 50% matching contribution for the employee's contributions above 1% of compensation and up to 6% of compensation; or 
• Nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute to the plan.

Employee's salary of $80,000 deferring 10% the match is:

• 100% on the first 1% of $80,000 = $800
• 50% on the next 5% of $4,000 = $2,000

Total match $2,800 = 3.50% of $80,000 

[Patricia Neal Jensen]

IRS FAQs - Auto Enrollment - Are there different types of automatic contribution arrangements for retirement plans?

Companies may choose different types of automatic contributions arrangements:

 

1. The basic automatic contribution arrangement described above
2. The eligible automatic enrollment arrangement (EACA)

An EACA is a type of automatic contribution arrangement that must uniformly apply the plan's default automatic contribution percentage to all employees after giving them a required notice. EACAs may allow employees to withdraw automatic enrollment contributions (with earnings). To withdrawal contributions, an employee must:

• elect to withdrawal under the plan terms (within 30 -90 days after the employee's first automatic enrollment contribution was withheld from wages).

Employees are 100% vested in their automatic enrollment contributions.

1. The qualified automatic enrollment arrangement (QACA).
   
   A QACA is an automatic contribution arrangement with special "safe harbor" provisions that exempts 401(k) plans from annual nondiscrimination tests. The special safe harbor is a schedule of uniform minimum default automatic contribution percentages starting at 3% and gradually increases each year an employee participates. Under a QACA:
   •  an employer must make a minimum of either:
     • a matching contribution of: 100% of an employee's contribution up to 1% of compensation and a 50% matching contribution for the employee's contributions above 1% of compensation and up to 6% of compensation; or 
     • a nonelective contribution of 3% of compensation to all participants, including those who choose not to contribute to the plan.
   • employees must be 100% vested in the employer's matching or nonelective contributions by two years of service.
   • A QACA may not distribute the required employer contributions due to an employee's financial hardship.