What Is an EACA and How Does It Work for Retirement Plans?

Employers looking to simplify retirement savings for their employees often turn to automatic enrollment features. One option, the Eligible Automatic Contribution Arrangement (EACA), allows businesses to automatically enroll workers while providing regulatory benefits and flexibility.

Understanding how an EACA functions helps employers determine if it aligns with their goals and allows employees to make informed decisions about participation.

Plan Requirements

An EACA must comply with guidelines under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Employers must apply a uniform automatic enrollment percentage to all eligible employees and allow them to opt out within 90 days without incurring early withdrawal penalties.

The plan typically covers employees who have completed up to one year of service and are at least 21 years old. Employers must provide written notice before each plan year, detailing default contribution rates, opt-out procedures, and modification options. This notice must be delivered at least 30 days before the plan year begins or before an employee becomes eligible.

EACAs must also pass nondiscrimination testing, including the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to ensure contributions do not disproportionately benefit highly compensated employees. Unlike a Qualified Automatic Contribution Arrangement (QACA), an EACA does not automatically qualify for an exemption from these tests, requiring employers to monitor contributions closely.

Enrollment Mechanisms

Employees are automatically enrolled in an EACA unless they opt out. Employers set a default contribution percentage, typically between 3% and 6% of an employee’s salary, which is deducted from paychecks and deposited into the plan.

Federal regulations require employers to notify employees in advance about the automatic enrollment process, default contribution rates, and how to opt out or adjust contributions. This notice must be provided in time for employees to make informed decisions and may be distributed electronically or in printed materials during onboarding.

Employees can modify their contribution rate or withdraw from the plan within the 90-day opt-out window. If they opt out within this period, contributions are refunded without the usual early withdrawal penalty but are subject to income tax. This feature distinguishes EACAs from other automatic enrollment arrangements by providing more flexibility.

Contribution Structures

Employers must apply default contribution rates consistently across all automatically enrolled employees. While there is no federally mandated minimum or maximum rate, many employers start between 3% and 6% of wages. Some plans include automatic escalation, increasing contributions annually—often by 1%—until reaching a cap, such as 10% of compensation.

Matching contributions are optional. Unlike a QACA, which requires a minimum employer match for safe harbor protections, an EACA does not impose matching requirements. However, many employers offer matches, such as 50% of employee contributions up to 6% of salary, to encourage participation. Employer contributions are subject to IRS limits, with total contributions (employee and employer combined) capped at $69,000 for 2024, or $76,500 for employees aged 50 and older using catch-up contributions.

Employees can choose between pre-tax and Roth contributions. Pre-tax contributions reduce taxable income in the year they are made, while Roth contributions are taxed upfront but allow for tax-free withdrawals in retirement. The choice depends on an individual’s tax situation and long-term financial goals.

Vesting Considerations

Employee deferrals are always 100% vested, meaning employees own their contributions immediately. However, employer contributions may follow a vesting schedule, determining when employees gain full ownership.

Employers can choose immediate vesting, where contributions belong to employees upon deposit, or a graded schedule, where ownership increases over time—often 20% per year, reaching full vesting after five years. Another option is cliff vesting, where employees gain no ownership until a set period, typically three years, after which they become fully vested.

Vesting schedules impact employee retention. A longer schedule encourages employees to stay with the company, while immediate vesting can be an attractive recruitment tool. Employers must clearly communicate vesting policies in plan documents.

Distribution Options

EACA participants have several options for accessing their retirement funds. Employees who opt out within 90 days receive a refund of contributions without the usual 10% early withdrawal penalty, though refunded amounts are taxed as income.

After the opt-out period, standard 401(k) withdrawal rules apply. Withdrawals before age 59½ typically incur a 10% penalty plus income tax unless an exception applies, such as disability or substantial medical expenses. Required Minimum Distributions (RMDs) begin at age 73 under current IRS regulations. Some plans allow in-service withdrawals or loans, providing access to funds under specific conditions while maintaining long-term savings. Employers must outline these options in plan documents.

Administrative Considerations

Managing an EACA requires employers to handle recordkeeping, employee notifications, and nondiscrimination testing. Employers must provide annual notices outlining rights, default contribution rates, and modification procedures at least 30 days before each plan year or an employee’s eligibility date.

Payroll systems must accurately process automatic contributions and employee adjustments. Errors can lead to compliance violations, requiring corrective actions such as refunds or additional employer contributions.

EACAs must pass ADP and ACP tests to ensure contributions do not disproportionately favor highly compensated employees. Failing these tests can result in required refunds to certain participants. Employers seeking to avoid these administrative burdens may consider a QACA, which provides a safe harbor exemption from these tests in exchange for mandatory employer contributions.