As an employer, there are two general goals attempting to be met when starting a retirement plan. Either to retain and recruit high quality employees, or to save money on taxes while saving for your own retirement.
For most, the Safe Harbor 401k is an easy way to accomplish these goals simultaneously.
It allows you to maximize your contributions while offering a robust retirement plan for your employees.
There is one big flaw to the Safe Harbor, however. The match is instantly vested, which means your employees could leave and take your match with them.
Introducing the QACA Safe Harbor 401k
QACA Safe Harbor 401k is actually two separate concepts. QACA is an acronym for Qualified Automatic Contribution Arrangement. As the title implies, the program automatically enrolls employees in a 401k plan.
The Standard Safe Harbor 401k, on the other hand, is essentially the 401k retirement plan with an automatic pass on the ADP, ACP, and top-heavy non-discrimination tests.
A QACA Safe Harbor 401k, consequently, is a retirement plan into which employees are automatically enrolled.
It has great benefits for all parties involved – especially the employer!
Standard Safe Harbor vs. QACA Safe Harbor 401k
A standard Safe Harbor 401k bears some similarities to a QACA, but there also exist some distinct differences in the number and types of requirements:
Vesting Schedule
As mentioned above, one downside to the standard Safe Harbor is that the employee could walk away with your match immediately after receiving it.
The QACA is the solution to this problem. It offers a 2 year “cliff” vesting schedule.
This means that the employee needs to stay with the company for 2 years before walking away from the company with your generous match. This a great incentive to retain quality employees for a longer period of time.
Matching Contribution
The standard Safe Harbor 401k plan offers employers two options for matching contributions.
The first is a basic match of 100% on the first 3% of the deferred compensation, plus a 50% match on subsequent deferrals totaling 4%.
The second option is an enhanced match of 100% on the first 4% of deferred compensation — the rule is that the enhanced match must be at least as generous as the basic match.
The QACA Safe Harbor, on the other hand, requires a match of 100% on the first 1% of deferred compensation, followed by a subsequent 50% compensation deferrals totalling 3.5%.
This difference also incentivizes the employee to contribute more towards the plan in order to get the match.
Default Deferral Rate
While the standard SH 401k does not have deferral rate requirements, the QACA does.
Due to the auto-enrollment, your employees will automatically be enrolled into the plan. The minimum requirement is 3% and has a maximum of 10% for the first year of participation.
If you have employees who don’t want to participate, they will simply need to opt-out of the plan.
Benefits of a QACA Safe Harbor 401k
A QACA SH 401k plan has benefits for all parties involved. Notable benefits include:
It bolsters participation in the retirement plan.
Allows the employer to maximize their contributions towards their own retirement.
Gives employees an incentive to stay with your company longer.
It protects businesses against anti-discrimination testing.
Employees can benefit from tax deferral.
Another notable benefit of a QACA Safe Harbor 401k plan is that employers who implement a plan will receive an additional $500 in tax credits, alongside the $5,000 they receive for the first three years by implementing a plan.
This is guaranteed under the SECURE Act, which was enacted in late 2019.
If you need help finding which plan makes sense for your company, schedule a plan discussion with us.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Direct: 952.828.5336
Email: kurt@ivoryhill.com | ivoryhill.com
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