Safe harbor 3% non-elective contributions - "traditional" vs "QACA"

[Combo Program Specialist]

We are looking into taking over the third party administration of a plan that currently has a QACA that utilizes the 3% non-elective contribution safe harbor method that vests after two years of vesting service.  We are exploring changing the ADP safe harbor method to traditional 3% non-elective which is 100% vested immediately, but if the administrator is already successfully administering the QACA, I am thinking this may not be in their best interest?  I think my question is, "is the ability to administer the QACA properly the only difference between a two year difference in vesting requirement, or are there other considerations?"  A two year vesting schedule seems like a huge benefit for a small trade-off.  The end goal of the program design is to add nonsafe harbor non-elective contributions to the plan and potentially also adopt a DB plan, I want to use the QACA safe harbor contributions towards top-heavy and 401(a) testing if i can, and if it makes sense to continue to maintain the QACA.

[Luke Bailey]

CPS, the tradeoff is that to get the QACA 2-year vesting you have to have automatic contributions. So with conventional SH plan, SH employer contribution is fully vested, but you may have fewer participants deferring than in QACA, so over time your SH contribution cost may be lower. It's an economic trade-off, and you have to guess at employees' behavior to cost it out.

[justanotheradmin]

16 hours ago, Luke Bailey said:

CPS, the tradeoff is that to get the QACA 2-year vesting you have to have automatic contributions. So with conventional SH plan, SH employer contribution is fully vested, but you may have fewer participants deferring than in QACA, so over time your SH contribution cost may be lower. It's an economic trade-off, and you have to guess at employees' behavior to cost it out.

I do think you are correct about the forfeitures. A QACA SH subject to vesting will allow some forfeitures to occur, and those can be used in future years towards new safe harbor contributions.

I don't see how having fewer participants deferring or not will impact that. If the QACA was structured as a match, yes, it might be more expensive due to increase participant from automatic enrollment (but also create more forfeitures), But CPS mentions a QACA 3% nonelective. So the traditional 3% SH nec will be the same as a QACA 3% nec (absent forfeiture available to reduce). It isn't impacted by how many defer.

[Luke Bailey]

34 minutes ago, justanotheradmin said:

I do think you are correct about the forfeitures. A QACA SH subject to vesting will allow some forfeitures to occur, and those can be used in future years towards new safe harbor contributions.

I don't see how having fewer participants deferring or not will impact that. If the QACA was structured as a match, yes, it might be more expensive due to increase participant from automatic enrollment (but also create more forfeitures), But CPS mentions a QACA 3% nonelective. So the traditional 3% SH nec will be the same as a QACA 3% nec (absent forfeiture available to reduce). It isn't impacted by how many defer.

CPS, I agree with justanotheradmin. My point only applies to matching QACAs.