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Qualified Automatic Contribution Arrangements (QACAs)


Qualified Automatic Contribution Arrangements (QACAs) are a type of automatic enrollment feature in certain retirement plans, such as 401(k) and 403(b) plans, designed to boost employee participation. Under QACAs, employees are automatically enrolled at a predefined contribution rate, which typically increases annually unless they opt out or make alternate selections. These arrangements must meet specific requirements set by the Internal Revenue Service, including employee notification and a specified employer matching contribution formula.


The phonetic pronunciation of the keyword Qualified Automatic Contribution Arrangements (QACAs) is:/kwəˈlīfīd ɔˈtəˌmatɪk kənˈtrɪbjuʃən əˈreɪnʤmənts (kwəkəz)/

Key Takeaways

  1. Automatic Enrollment: A QACA is a type of 401(k) retirement plan which automatically enrolls employees and provides for mandatory contributions by the employer. This helps to increase participation in the plan, making it more effective in achieving retirement savings goals of employees.
  2. Employer Match and Vesting: Under a QACA, employers are generally required to match a certain percentage of employee contributions (up to a maximum limit) or provide a non-elective contribution for all eligible employees. Additionally, QACAs have faster vesting schedules than traditional 401(k) plans, allowing employees to gain full ownership of employer contributions sooner.
  3. Safe Harbor Provision: Plans that are designed as a QACA can enjoy “safe harbor” status, providing automatic relief from certain non-discrimination testing requirements. This is beneficial for employers as it allows them to provide higher contributions to highly compensated employees without the risk of violating IRS regulations.


Qualified Automatic Contribution Arrangements (QACAs) are important in the realm of business and finance as they encourage increased participation in employer-sponsored retirement savings plans, such as the 401(k). QACAs enable employers to automatically enroll eligible employees in the retirement plan with a preset default contribution rate that escalates over time. This structure helps employees save for their future and make consistent contributions without requiring their active intervention. Moreover, QACAs provide employers with several benefits, including tax incentives, reduced likelihood of non-discrimination testing failure, and enhanced employee satisfaction due to a well-designed retirement savings program. Consequently, QACAs play a significant role in improving financial security for employees while supporting businesses in retaining and motivating their workforce.


Qualified Automatic Contribution Arrangements (QACAs) are designed to promote increased employee participation in employer-sponsored retirement plans. An essential goal of QACAs is to encourage employees to save for their retirement and thereby secure their financial future. By automatically enrolling eligible employees in the retirement plan, QACAs remove the inertia that many individuals face when deciding whether to join the plan voluntarily. This automatic enrollment process helps employees overcome procrastination or indecision, leading to higher rates of participation and ultimately, increased retirement savings for a broader section of the workforce. In addition to increasing employee participation in retirement plans, QACAs also help employers meet compliance requirements under the Pension Protection Act (PPA) of 2006. By meeting certain criteria, including offering a minimum level of employee contributions or providing matching employer contributions, QACAs can help employers receive safe harbor protection, which allows them to avoid certain nondiscrimination testing requirements applicable to standard 401(k) plans. Consequently, QACAs allow employers to make contributions to their highly compensated employees without violating the Internal Revenue Service (IRS) nondiscrimination rules. Embracing QACAs aligns employers’ and employees’ interests, ensuring that retirement plans cater to a diverse range of workers and promote a culture of long-term financial planning for all members of the organization.


Qualified Automatic Contribution Arrangements (QACAs) are an essential feature of many 401(k) retirement plans that guide employees in their retirement savings by defaulting them into automatic contributions. Here are three real-world examples of QACAs in action: 1. ABC Corporation’s 401(k) Plan: ABC Corporation offers its employees a 401(k) retirement plan with a QACA feature to encourage participation in their retirement savings. When a new employee joins the company, they are automatically enrolled into the 401(k) plan with a presumptive 3% of their salary being deferred towards retirement savings. Employees can choose to opt-out or increase/decrease their contributions, but the QACA ensures they start saving early unless they choose otherwise. ABC Corporation also provides a matching contribution of 100% up to 1% of the employee’s deferred income, and 50% up to the next 5% of deferred income. 2. XYZ Services’ Small Business SIMPLE IRA: XYZ Services, a small business with less than 100 employees, has established a SIMPLE IRA plan with QACA features. The plan requires automatic enrollment at a 3% contribution rate for all eligible employees. The QACA enables employees to opt-out or change their deferral rate, and the employer offers a non-elective 2% contribution for all employees. 3. LMN Retail Company’s Safe-Harbor Plan: LMN Retail has adopted a Safe-Harbor 401(k) plan for its employees, including the QACA feature. By deciding to use this feature, LMN Retail is exempt from ADP testing as long as it meets the QACA requirements of providing automatic enrollment of eligible employees and escalating contributions over time. The company starts with an automatic 3% deferral rate, which gradually increases to 6% over three years, with a cap at 10%. Additionally, LMN Retail provides a 100% match up to the first 4% of an employee’s deferral.

Frequently Asked Questions(FAQ)

What is a Qualified Automatic Contribution Arrangement (QACA)?
A Qualified Automatic Contribution Arrangement (QACA) is an automatic enrollment feature in certain retirement plans, such as 401(k) plans, where eligible employees are automatically enrolled to contribute a specified percentage of their salary. QACAs are designed to promote and increase employee participation in retirement savings.
How does QACA work?
Under a QACA, employees are automatically enrolled in the retirement plan at a predefined contribution rate, unless they actively choose to opt-out or make changes to their contribution rate. Additionally, QACAs require employers to make either a matching or non-elective contribution for their employees, and the plan must comply with specific vesting and notice requirements set by the IRS.
What are the mandatory employer contributions for a QACA?
Employers are required to make one of the two types of contributions for their employees under a QAC
What are the vesting requirements for a QACA?
Employer contributions under a QACA must follow a two-year cliff vesting schedule. This means that an employee must be 100% vested in employer contributions after two years of service. No partial vesting is allowed before the two-year mark.
What are the employee contribution rate requirements for a QACA?
Under a QACA, the initial default employee contribution rate must start at a minimum of 3% of compensation. The default rate should gradually increase at least one percentage point per year until it reaches at least 6% but not exceed 10% of the employee’s compensation.
Are employees required to participate in a QACA?
No, employees are not required to participate in a QACA. Employees may opt-out of the plan or change their contribution rate at any time.
Does a QACA plan have to pass annual non-discrimination testing?
QACAs are exempt from the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) non-discrimination testing if they meet certain criteria set forth by the IRS. However, the plan must still pass the Top-Heavy test and satisfy other compliance regulations.
What kind of notice must be provided to employees under a QACA?
Employers are required to provide a written notice to employees within a reasonable timeframe before the start of each plan year. This notice should include details about the QACA, including the default contribution rate, employees’ rights to opt-out or change contribution rates, and the employer’s contribution formula.

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