How Do Different Plan Contribution Safe Harbors Work?

Q: We sponsor an Employee Retirement Income Security Act 403(b) plan that consistently fails its actual contribution percentage testing. We are exploring safe harbors to avoid ACP testing entirely; can you explain the differences between the qualified automatic contribution arrangement safe harbor and the ACP safe harbor?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Certainly! The most fundamental difference between the two safe harbors is that the QACA requires that all participants be automatically enrolled in the plan at a minimum deferral rate of 3% of compensation (maximum 10% deferral rate), and the ACP safe harbor has no such requirement. In a QACA safe harbor, if the automatic deferral rate is less than 6%, it must also increase by at least 1% each year until it reaches 6% (with a maximum of 15% permitted after the first full plan year).

In addition, if relying on matching contributions, the required employer contribution for each safe harbor type is different. For a QACA, the employer must contribute a match of at least 100% of the first 1% of elective deferrals and 50% of the next 5% (resulting in a minimum total match of 3.5% at 6% deferral level). For the ACP safe harbor, the employer must contribute a match of at least 100% of the first 3% of elective deferrals and 50% of the next 2% (for a minimum total match of 4% at 5% deferral level). In either case, matching contributions may not be made on deferrals in excess of 6% of compensation.

Another major difference is that QACA safe harbor employer contributions can be subject to a two-year cliff vesting schedule, but ACP safe harbor contributions must be 100% vested.

Overall, the QACA safe harbor can be more complicated to administer than the ACP safe harbor due to its automatic enrollment feature, but it can also cost less due to more liberal contribution and vesting requirements.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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