Auto-Enrollment, Simplified

By John Iekel • August 13, 2018 • 0 Comments
Washington, and federal agencies, are rife with an alphabet soup of acronyms — and the IRS is certainly part of it. A recent blog entry addresses some of the collections of letters applicable to auto-enrollment.

In “Making Sense of Auto-Enrollment Rules,” Michael Webb of Cammack Retirement discusses the acronyms used in common parlance concerning auto-enrollment. “To start, the IRS doesn’t call it auto-enrollment, they refer to it as an ‘automatic contribution arrangement.’ And thus, the acronyms, like ACA (for automatic contribution arrangement), often mystify people,” he writes.

Cammack provides an overview of the acronyms common to auto-enrollment, content he intends “to make complicated things simple” and put things in “plain English” in order to counter a federal mindset he says he sometimes thinks may exist whose underlying premise is “How can I make this as difficult to understand as possible?”

Automatic Contribution Arrangement (ACA). Webb says this acronym denotes “the ‘plain vanilla’” kind of auto-enrollment most plans use. He adds that other advantages to this kind of arrangement include that it requires only an amendment to the plan and providing adequate notice, and that it is the only such arrangement that will allow enrollment to be restricted to only newly hired employees.

Eligible Automatic Contribution Arrangement (EACA). Webb explains that through an EACA, employees can withdraw automatic contributions — including earnings — within 90 days of the date the first automatic contribution was made. He adds that EACAs also give employers an additional 3½ months in which they can make penalty-free distributions in order to fix ADP or ACP test failures, so they have six months. Webb adds that there is a caveat, however: all employees must be auto-enrolled, and an EACA cannot be adopted mid-year.

Qualified Automatic Contribution Arrangement (QACA). Webb notes that QACAs offer the ability to avoid ADP and ACP non-discrimination testing. But like EACAs, he notes, there is a flip side: employers are required to make contributions, which must be either a 3% non-elective contribution or a 100% match of the first 1% deferred, plus 50% of the next 5% deferred (with a required maximum match of 3.5% if 6% is deferred).

In addition, Webb notes, the employer match must be vested after two years of service and cannot be distributed even if a participant experiences financial hardship. Also, the automatic deferral rate must be a least 3% and must increase annually until it reaches 6% of pay. Further increases are optional, he says, but automatic deferrals cannot exceed 10%. And QACAs also cannot be added mid-year, but a QACA can incorporate an EACA feature if a plan sponsor wants to allow automatic contribution withdrawals

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