March 26, 2008
FYI: Adding Qualified Automatic Contribution Arrangements
By Cindy Van Bogaert
Here is your latest FYI: Employee Benefits
Update from Cindy Van Bogaert, Partner and Chair of the Employee
Benefits Practice Group at Boardman Law Firm LLP.
This FYI addresses timing issues for implementing Qualified Automatic Contribution
Arrangements ("QACAs"). QACAs are automatic enrollment safe harbor
401(k) plans that provide relief from some nondiscrimination testing that applies
to traditional 401(k) plans. In exchange for nondiscrimination relief (which
may allow greater contributions by the highly compensated employees), the QACA
must include mandatory employer contributions (with only up to a 2 year vesting
schedule) and must impose withdrawal restrictions. The QACA has notice requirements
and requires a plan amendment.
The QACA generally must require automatic deferrals for those who do not let the plan know how much they wish to defer. The automatic deferral rate can be between 6%-10% (the law allows you to start employees at 3% and work up to 6%). The mandatory employer contribution must be either 3% for all participants or a graduated match of 3.5% on deferrals.
As indicated, a plan amendment is required and, as with all plan amendments, timing is important. In my BenefitsLink 401(k) Q&A column, I recently addressed a question regarding timing considerations when adding QACAs to plans with off-calendar year plan years. However, many of the timing considerations will be of interest for plans with calendar year plan years as well.
Here is the link to the Q&A:http://benefitslink.com/modperl/qa.cgi?db=qa_401k&id=73
This FYI is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel. Nothing in this FYI is intended to be used, and no information can be used, for the purpose of avoiding penalties under the Internal Revenue Code, or promoting, marketing, or recommending to another party any transaction or matter addressed in this FYI.
If you have any questions or need assistance, please contact Cindy Van Bogaert at (608) 281-7543 or Email.
Would you like to have FYI: Employee Benefits Update sent directly to your e-mail inbox? If so, please send your request, with e-mail address, to Cindy Van Bogaert at Email.