ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in California addressed a question on a qualified automatic contribution arrangement (QACA). The advisor asked: “My client is implanting a QACA in her 401(k). Does she have to apply the default election provision to all participants?”
Highlights of the Discussion
In general, according to IRS rules, your client would not have to apply the QACA default election to any employee who is eligible to participate in the 401(k) plan prior to the effective date of the QACA and has a previous salary deferral election in place or has affirmatively elected not to defer at all [ Treas. Reg. § 1.401(k)-3(j)(1)(iii)].
However, your client should check the terms of the plan document for the precise application of the default election. Sometimes a plan can be designed to apply the default election to those participants whose current deferral percentages are less than the QACA default deferral percentage.
Also, it could be possible for a plan to contain a provision where a participant’s current election expires after a set amount of time. In that case, the plan could then apply the QACA default percentage unless the affected participant executes another affirmative deferral election or opts out.
Conclusion
In a 401(k) plan with a QACA, there are exceptions to applying the QACA default deferral percentage. The best source to turn to is the plan document for the precise application of the QACA default election.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
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