By 2025, most startup retirement plans will be required to automatically enroll new employees into their plan, unless they opt out, at an initial 3% employee deferral rate with auto escalation. – Sound familiar?
The SECURE 2.0 automatic enrollment mandate states an initial automatic enrollment at a 3% employee deferral rate with 1% automatic escalation up to 10% but no more than 15%. In contrast, a Qualified Automatic Contribution Arrangement (QACA) Safe Harbor has initial automatic enrollment at a 3% employee deferral rate with 1% automatic escalation of up to 6%.
Meaning, with a slight adjustment to the auto escalation requirement, a QACA operates as a Safe Harbor and satisfies the new mandate.
Benefits from implementing a Safe Harbor plan include, but not limited to, passing ADP/ACP testing, avoiding corrective distributions and/or initially satisfying Top Heavy minimums.
But wait! There’s more… let’s explore why a QACA Safe Harbor may be considered the new norm over a Traditional Safe Harbor approach.
Below is a chart used to compare the differences between Traditional Safe Harbor and Safe Harbor with QACA.
In summary, leveraging a Traditional Safe Harbor strategy to maximize benefits for HCEs has been standard practice; however, since the passage of the SECURE Act 2.0, one could argue a new norm is upon us.
Not only do you get the benefits of a lower match obligation and a stretched vesting schedule; adopting a QACA Safe Harbor plan design can also meet the auto enrollment mandate for newly established retirement plans.
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