Is Inertia Working Against Your 401(k) Plan?
Automatic ContributionArrangements
Two types of automatic contribution
arrangements were created by the PPA:
an eligible contribution arrangement
(“EACA”) and a qualified automatic
contribution arrangement (“QACA”).
Below is a brief description of each
arrangement. Plan sponsors and
committees should be advised that
these arrangements contain a number
of technical requirements (e.g., notice
timing and content requirements) and
it is advisable to confer with benefits
counsel regarding these requirements
prior to implementation.
EACAs
An EACA is an automatic contribution
arrangement that is exempt from certain
distribution restrictions that normally
apply to 401(k) plans. A participant who
is automatically enrolled in an EACA
is entitled to a 90 day period to revoke
the automatic enrollment and receive
a withdrawal of the elective deferrals
that were made on the participant’s
behalf (plus earnings). The withdrawn
amounts are includible in the participant’s
income, but not subject to the 10% early
withdrawal penalty. Plans that adopt
EACAs also are able to distribute excess
contributions and excess aggregate
contributions to correct failed actual
deferral percentage (“ADP”) and actual
contribution percentage (“ACP”) tests
within 6 months after the end of the plan
year in order to avoid a 10% excise tax
payable by the employer (this period is
normally 2-1/2 months).
To qualify as an EACA, a notice must
be provided to participants prior to
enrollment and annually thereafter.
While many plan sponsors automatically
enroll employees at a 3% deferral rate,
there is no required initial deferral rate
to qualify as an EACA. They may
be designed to automatically increase
the deferral rate in subsequent years of
participation.
QACAs
QACAs are automatic enrollment
arrangements similar to EACAs but
with the added benefit of including a
nondiscrimination safe harbor. A plan
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