The Maximum QACA Automatic Increase Percentage is Movin’ on Up

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A Brief Summary of Recently Issued IRS Safe Harbor 401(k) Plan Guidance

By Benjamin Gibbons

For those of you who have been following along at home (literally these days), you know that the SECURE Act, which was passed only at the end of last year (though it feels like forever ago), instituted a wide range of retirement plan changes, including a number of changes with respect to safe harbor 401(k) plans. On December 9, 2020, the IRS issued guidance on these safe harbor changes in the form of Notice 2020-86.

More specifically, the SECURE Act (in part): (1) increased the maximum automatic contribution percentage for qualified automatic contribution arrangement (QACA) safe harbor 401(k) plans from 10% to 15%; (2) provided plan sponsors the ability to implement a retroactive safe harbor nonelective contribution during a plan year (generally provided the plan is amended at least 30 days before the end of the plan year); and (3) eliminated the safe harbor notice requirement for most plans with safe harbor nonelective contributions. The Notice, in Q&A format, provides additional guidance on each of these SECURE Act changes. A brief summary of the key provisions of the Notice follows.

QACA Automatic Increase Maximum

  • A QACA plan is not required to implement the new maximum automatic contribution percentage and can set its maximum percentage to any percentage from 6% through 15%.
  • Plans that incorporate the maximum percentage by reference to the statute will be considered to now use a 15% maximum unless the plan is otherwise amended by the last day of the first plan year beginning on or after
  • January 1, 2022 (or December 31, 2022 for calendar year plans).
    After the above SECURE Act amendment period expires, amendments to a plan’s maximum automatic contribution percentage will be subject to the general discretionary amendment deadlines.

Elimination of Safe Harbor Notices for Nonelective Contributions

  • A plan with safe-harbor nonelective contributions that also has a non-safe harbor match, must still provide an annual safe harbor notice to participants if it intends to exempt the match from ACP testing
  • The Notice provides that the SECURE Act does not change any other requirements that may apply to a plan that satisfies the safe harbor nonelective contribution requirements applicable to a traditional or QACA safe harbor plan.

Retroactive Safe Harbor Status for Nonelective Contributions

  • If a safe harbor plan is amended during the year to reduce or suspend safe harbor nonelective contributions, and the contributions are subsequently reinstated during the same year, then no ADP, ACP or top-heavy testing is required for that year, provided that the nonelective contributions are reinstated no later than 30 days before the last day the plan year and contributions are retroactively restored for the entire plan year.
  • The Notice also contains additional guidance concerning retroactive safe harbor nonelective contribution amendments and the deductibility of certain retroactive nonelective contributions.

Also of note, the Notice provides that the guidance will apply to 403(b) plans as well to the extent such plans rely on the safe harbor rules to pass ACP testing.

Plan sponsors with a QACA or that provide safe harbor nonelective contributions (or those that are considering implementing such contributions) should review the Notice carefully to ensure continued compliance.