Setting Up a Retirement Plan for Your Business

October 5, 2024  | By Shane McDougald, CFP®

It’s a tough labor market, and retaining the best talent is a challenge for many businesses. One way to attract and keep skilled team members is to offer a 401(k) plan with a match that sets you apart from your competitors.

It’s important to set up the plan the right way to give you as the owner the best bang for your buck. Good plan setup also can make it easy for your team members to start funding their retirement.

If you are considering starting a 401(k) in 2025 or you have a 401(k) plan, consider a QACA Safe Harbor Match.

Setting up your plan to succeed from the start is an important part of having a 401(k) plan that works for you, the owner and the employees.

With recent changes to retirement plan law requiring new 401(k) plans to automatically enroll employees, the qualified automatic contribution arrangements (QACAs) are the matching plan design of choice. For the following reasons:

BENEFITS FOR EMPLOYERS

Simplified Compliance

QACA plans often meet the requirements to automatically pass certain IRS compliance tests, such as the Actual Deferral Percentage (ADP) test, reducing administrative burdens.

Attractive to Employees

Automatic enrollment and escalation features can make the plan more appealing to employees, potentially increasing participation rates.

Flexibility in Vesting

Employers can apply a vesting schedule of up to two years for safe harbor contributions, which can help with employee retention.

Reduced Fiduciary Risk

By meeting safe harbor requirements, employers can reduce the risk of failing nondiscrimination tests, which can lead to penalties and corrective actions.

Cost Savings

QACA matching contributions are typically half a percentage point lower in matching costs compared to traditional matching, providing cost savings for employers.

BENEFITS FOR EMPLOYEES

Automatic Enrollment

Employees are automatically enrolled, ensuring they start saving for retirement without needing to take initial action.

Automatic Escalation

Contribution rates increase automatically over time, helping employees save more effectively for retirement.

Employer Matching Contributions

QACA plans include employer matching contributions, which can significantly boost employees’ retirement savings.

Flexibility and Control

Employees can opt out or change their deferral rates at any time, giving them control over their contributions.

Refund Option

Automatically enrolled participants can request a refund of their contributions within 90 days, providing flexibility if they change their mind.

SUMMARY OF QACA PLAN REQUIREMENTS

Automatic Enrollment

• Employees are automatically enrolled in a 401(k) plan after a set deadline.
• Contributions start at a default deferral rate unless employees opt out or choose their own rate.

Default Deferral Rate

• Must be between 3% and 15%.
• Employees can opt out or change their rate anytime.
• Automatically enrolled participants can request a refund within 90 days of the first automatic deferral.

Automatic Escalation

• Deferral rates increase annually unless employees set their own rate.
• Not required if the starting deferral rate is 6%(old) or 10%(new).

Safe Harbor Features

• Plans meeting certain requirements can bypass annual IRS compliance testing.
• QACA plans have a different employer matching contribution formula compared to traditional safe harbor plans.

Vesting

• QACA plans can apply a vesting schedule of up to two years.
• Commonly use a two-year cliff vesting schedule or a graded vesting schedule.

Notice Requirements

• Specific notice requirements for employees, combining automatic enrollment and safe harbor notices with additional automatic escalation notifications.

​If you are considering making a change to your existing safe harbor plan design or starting a plan, please schedule a meeting to discuss the timing of making changes to your plan or starting a 401(k) plan.