Safe Harbor to QACA

[PMC]

Employer wants to convert existing Safe Harbor plan to a QACA but they want to keep their existing Safe Harbor "Basic" match formula. The existing Basic will provide a 4% contribution for those contributing 5%. The QACA minimum will provide 3 1/2% for those contributing 6% and according to the QACA rules there must be an automatic contribution escalation from 3 to 4 to 5 to 6%. Couple of questions -

Since the "basic" safe harbor contribution will meet the QACA minimum (3 1/2%) once the participant contributes 4% (automatic increase from 3% to 4%), must the plan automatically increase the participant contributions from 4% to 5%? And then from 5% to 6%?

The new QACA will only have to be provided to those existing employees who have made no election to participate (or not), and to newly eligible employees as of the QACA effective date who make no election. Is that correct?

Vesting - since existing participants are 100% vested in the Safe Harbor Basic contribution, must those participants continue to remain 100% vested in the new QACA contributions? EOB Sec. XIV, Part C, 1.d.3 says yes but just wondering if anything changed since that printing. I seem to recall there was some discussion that the QACA could be viewed as a "separate contribution source" from the regular safe harbor and therefore the 2 year vesting could apply.

Thanks

[Tom Poje]

I think most of us are waiting for the final regs on the issue. The IRS has promised they are coming soon, but maybe not soon enough since the Dec 1 deadline is fast approaching. sorry, can't be more help.

[Guest Sieve]

A QACA, by definition, is a safe harbor 401(k) plan which requires, among other things, that there be automatic escalation for those who enter the plan at the 3% auto enrollment level. Otherwise, if that provision does not apply throughout, it is not a QACA. If you stop the auto escalation for some participants, then the QACA goes out the window. You can't mix a QACA for some participants with a normal safe harbor for others--which is what you are suggesting: reach a certain deferral level, & we're turning the QACA into a SH. Can't do.

I believe you are correct as to those who must be part of the QACA. Those who become eligible after the commencement of the QACA must also be subject to the QACA's auto enrollment and auto escalation unless they elect otherwise.

In my opinion, I believe that a QACA contribution is a separate source, and can be subject to its own vesting schedule. Even a SH plan, with its full vesting of the SH contribution, can have gradual vesting of the match (even though that match may not be subject to ACP testing), so that the SH contribution and the match are separate sources. Tripodi insists that a QACA is still a SH contribution (and your cite, by the way, is in Chapter 11), and therefore is a single source. Although a QACA certainly is a safe harbor plan, I disagree with Tripodi's conclusion (not the first time that I've disagreed with Tripodi), because the QACA contribution is a specific type of contribution that is subject to its own unique and separate vesting schedule by definition--just like QNECs must be fuilly vested, and the traditional SH contribuition must be fully vested, the QACA can vest over 2 years. I think it's the unique vesting schedule applicable to certain contributions that makes a specific contribution a separate source (which therefore is subject only to its own vesting schedule), so a plan's vesting schedule is not being amended when it is changed from a SH plan into a QACA--a specific type of contribution is being added to the plan, and it brings its defintional vesting schedule with it.

[K2retire]

I agree with Larry - especially on the separate source because of the different vesting.

I have heard others who seem to think that you can have a single plan with some participants who are QACA, others who are EACA, some who are both, and still others who are neither. It has not been explained to my satisfaction, but I gather it would involve component plans for testing (or not).

[Guest Sieve]

K2 --

Certainly, those who choose not to auto enroll, or enroll at a different rate than the auto enroll rate--and therefore are not part of the QACA scheme--are still in a plan that is a QACA, and my understanding is that it would still be a safe harbor.

Are you suggesting that those who auto enroll & auto escalate, & remain in the QACA track, are in a safe harbor plan, but that all those who opt out (i.e., enroll at a different rate) are subject to ADP/ACP testing?

[K2retire]

I never got an explanation that made this suggestion make sense to me. The discussion was with people charged with updating administration software. I am suspicious that they were wrong -- but they were insistent that those things were all possible within the same plan.

[Tom Poje]

and the latest news is (so we may know the answer to some of our questions real soon!):

Final Auto-Enrollment Regulations Are In Clearance Process, IRS Official Says

Final regulations concerning auto-enrollment are in the clearance process and are “pretty much done,” an Internal Revenue Service official said Nov. 17 at an employee benefits conference sponsored by BNA.

The regulations are a high priority and should be out by the end of the year, Martin L. Pippins, manager of Employee Plans, Technical Guidance and Quality Assurance at IRS's Tax Exempt and Government Entities Division, said at the conference.

At the same time the auto-enrollment regulations are released, IRS will issue an updated sample notice to participants, like the one issued in November 2007 (221 PBD, 11/16/07; 34 BPR 2703, 22/30/07), which covers qualified automatic contribution arrangement (QACAs) and eligible automatic contribution arrangement (EACAs), Pippins said. The model notice is intended to be an example, and plan sponsors can deviate somewhat from the language and still be fine, he said.

Pippins said IRS received many comments on the proposed regulations on auto-enrollment (REG-133300-07). One of the big sources of concern was whether an EACA could or should be adopted in the middle of a plan year, he said, noting the final regulations will address this issue.