Making Sense of Auto-Enrollment Rules

While the IRS means well, when reviewing some of the regulations, I cannot help but wonder if someone was thinking, “How can I make this as difficult to understand as possible?”

Such is the case with automatic 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. Additionally, there are actually three types of auto-enrollment; and the acronyms used are quite similar to one another (i.e., ACA, EACA, QACA). Thus, we can eliminate any last hope of anyone other than of attorneys following along.

But Top of Mind attempts to make complicated things simple! Here are the three different types of auto-enrollment, in plain English:

  • Automatic Contribution Arrangement (ACA) This is the “plain vanilla” type of auto-enrollment that the vast majority of plan sponsors utilize. It is also the least restrictive, as plan sponsors need only to amend their plan and provide adequate notice. It is also the only type that allows plan sponsors to enroll only new hires, as opposed to the entire employee population.
  • Eligible Automatic Contribution Arrangement (EACA) This type of auto-enrollment allows employees to withdraw automatic contributions, including earnings, within 90 days of the date that the first automatic contribution was made. It also increases the period for employers to make penalty-free distributions to remedy ADP or ACP test failures from 2½ to 6 months. However, in exchange for this benefit, plan sponsors must auto-enroll all their employees, rather than just new hires. In addition, an EACA cannot be adopted mid-year; thus, it is not nearly as popular an option as an ACA.
  • Qualified Automatic Contribution Arrangement (QACA) This type of auto-enrollment provides a huge benefit to plan sponsors: the ability to avoid ADP and ACP non-discrimination testing, if applicable. However, this test relief comes at a price. Employer contributions are required under QACA and 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). The match must be vested after two years of service and cannot be distributed in the event of financial hardship. In addition to the required employer contribution, the automatic deferral rate must be set at a minimum of 3% and must increase each year until it reaches 6% of pay (further increases are an optional feature, but automatic deferrals cannot exceed 10%). Like an EACA, a QACA cannot be added mid-year, but a QACA can incorporate an EACA feature if the plan sponsor wishes to allow automatic contribution withdrawals. Due to these restrictions (and the fact that most employers don’t understand the difference between an ACA/EACA/QACA in the first place!), the QACA is not a popular option at present.

While there are some other technical differences between the various auto-enrollment types in this alphabet soup of “automatic contribution arrangements,” we promised to keep it simple. Are you utilizing an EACA or QACA? Has it been a success? Let me know on Twitter or at

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. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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