QACA Automatic Enrollment Increase

[DTH]

A plan has a QACA feature with a minimum 1% default deferral percentage and a maximum of 6%. If an employee is automatically enrolled into a plan on 7/1/2008, under the regulations the participant must be increased to 2% on 1/1/2010 (unless elects otherwise). Can the plan be drafted to increase the participant on 1/1/2009?

Thanks!

[Guest Sieve]

Yes.

[Guest Sieve]

To expand on my own 1-word answer (for those interested in the reasons for the conclusion) . . .

(NOTE: By the way, DTH . . . you cannot begin a QACA with a 1% deferral and then increase it to 2% in the first automatic increase (as you suggest in your post). The intitial deferral must be at least 3%, and the next increase must take the deferral to at least 4%--as described further below. Remember, however, auto enrollment and auto escalation do not have to meet QACA requirements if you do not want the arrangement to be a safe harbor--and those percentages then can be whatever you want them to be. But, a QACA, by definition, is a safe harbor arrangement, and your description is not a QACA but, rather, an auto enrollment/auto escalation arrangement. But, my response to your question is based on a QACA being in place.)

A QACA is defined in the regs as requiring, among other things, that there be an automatic contribution arrangement ("ACA") where the default election is equal to a "qualified percentage" multipled by the individual's compensation (Prop. Treas. Reg. Section 1.401(k)-3(j)(1)(i)).

A deferral percentage is a "qualified percentage" if, among other things, it meets "minimum percentage requirements" concerning initial automatic deferrals and subsequent automatic escalations (Prop. Treas. Reg. Section 1.401(k)-3(j)(2)(i)©). One of the "minimum percentage requirements" is the "initial-period requirement", defined as an ACA which "applies for the period that begins when the employee first participates in the [QACA] . . . and ends on the last day of the following plan year . . ." and which is equal to "at least 3 percent". (Prop. Treas. Reg. Section 1.401(k)-3(j)(2)(ii)(A)).

Read strictly, a QACA's initial-period requirement of at least 3% could be interpreted to mean that no change from the initial ACA percentage is permitted during the initial period (i.e., from the employee's QACA eligibility date until the end of the following plan year). Clearly, however, the initial-period percentage is merely a minimum, and the preamble to the proposed regs indicates that that percentage can be higher: an example in the preamble indicates that a plan's initial-period requirement could be 4%, and then the second-year requirement--which must be a minimum of 4%--could remain at the initial-period 4% and would not have to increase by 1%. In fact, the initial-period requirement could conceivably be as high as 10% (the maximum ACA deferral percentage that a QACA can require - Prop. Treas. Reg. Section 1.401(k)-3(j)(2)(i)(B)).

So, there seems to be no reason that a QACA would not be permitted to have additional ACA increases at times other than the times prescribed in the regulations (initial-period, second-year, third-year and later years), as long as the minimum percentage requirements are met (each of which, by the way, must be "at least" a specific percentage - Prop. Treas. Reg. 1.401(k)-3(j)(2)(ii)(B), © and (D)), and as long as the 10% maximum percentage is not exceeded. Of course, non-QACA auto enrollment and auto escalation percentages do not have to abide by the QACA rules.

At least that's how I view it. Prototype plans probably will not be very flexible, but, for what it's worth, Corbel's volume submitter--as an example--has a selection which permits automatic escalation changes to occur on a plan year basis.

As I've said before, part of the problem with the QACA concept and its proposed regulations is that we still have no real guidance with regard to vanilla ACAs (i.e., those which are not meant to be QACAs and which do not want to allow returns of ACA amounts within 90 days of the initial ACA), so we don't know if, for example, we can have ACAs each quarter, or each month, or semi-annually, or even every 2 years. There are many basic concepts which remain unexplained and uncharted, and those missing links hamstring any basic ACA design features.