401(k) Automatic Deferrals With a Safe Harbor Twist

By G. Alexander Hamilton

Memo to 401(k) Plan Sponsors –

Do you hate dealing with the ADP/ACP nondiscrimination tests each year?

Does your plan have trouble passing the tests?

Does the automatic enrollment/deferral feature that the government encourages interest you?

If the answer to any of these questions is “yes,” you may want to consider modifying your plan to make it a “Qualified Automatic Contribution Arrangement” or “QACA.” The QACA rules were enacted as part of the Pension Protection Act of 2006 (PPA) and are effective beginning in 2008. Final regulations were adopted in 2009. The QACA combines automatic enrollment/deferrals with certain minimum employer contributions — either across the board contributions or matching contributions — such that the annual ADP/ACP nondiscrimination rules are automatically satisfied and no testing is necessary. This is one of two “safe-harbor” design options that are available for 401(k) plan sponsors who want to avoid the annual ADP/ACP testing requirements.