What is an automatic contribution arrangement?

Answer: An Automatic Contribution Arrangement (“ACA”) is a feature in a 401(k) plan that that allows an employer to automatically “enroll” an eligible employee in the plan unless the employee affirmatively opts out of the plan. “Enroll” means that part of the employee’s wages are contributed to the 401(k) plan on the employee’s behalf. Although most commonly part of a 401(k) plan, an ACA can also be a feature in a 403(b) plan, SARSEP and Simple IRA plan.

Under an ACA, an employer automatically reduces an employee’s wages by a default percentage stated in the plan document and contributes that amount to the 401(k) plan account as an automatic enrollment contribution. The employee may affirmatively choose not to contribute at the plan’s default percentage rate or contribute at a different percentage. The employee is 100% vested in the amount automatically contributed.

Most plans will deduct automatic contributions from an employee’s pre-tax wages. ACA’s encourage employees to begin contributing to the plan as soon as they are eligible to join the plan and start saving for their retirement. An ACA is considered a very effective way for an employer to increase participation in the 401(k) plan and often makes it easier for the plan to pass the annual nondiscrimination testing requirements.