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The 401(k) Adoption Agreement Explained

Evan Ross
November 7, 2018
The 401(k) Adoption Agreement Explained
Table of contents

What’s got you searching for a 401(k) adoption agreement? Maybe you’re looking into establishing a 401(k) for your company. Or perhaps you’ve realized it’s time to make a change to how your plan is run?

Both are often excellent, if tough, decisions.

So, we’re doing our part to make it a little easier. In this easy-to-read 401(k) plan document reference guide, we’ve got just about everything you need to know about 401(k) adoption agreements:

What is the 401(k) Adoption Agreement?

Quick Definition:

The 401(k) adoption agreement is the document that defines the specific features of your 401(k) plan. The Adoption Agreement is created by the Third Party Administrator, or TPA, using their Basic Plan Document. The Basic Plan Document contains all of the possible options that could be chosen under that TPA’s document options.

The 401(k) Adoption Agreement Explained:

Through the adoption agreement, an employer who sponsors a 401(k) plan (a plan sponsor), will choose the rules will apply to their retirement or benefit plan. These include parameters like:

  • The plan’s eligibility requirements
  • Type/amount/method of contributions allowed in the plan
  • Plan contribution vesting schedules
  • Distribution options
  • Other operational 401(k) plan details

Plan sponsors/administrators may have little day-to-day need to reference an adoption agreement and may only refer to one when:

  • The employer decides to provide retirement benefits to their employees
  • A plan sponsor decides to make amendments to its current 401(k) retirement plan.

If you fall into either of these categories, you’ll need to (re)visit the 401(k) adoption agreement to establish the terms of a new retirement plan.

It’s worth noting that the adoption agreement is a section of the full plan document (made up of the basic plan document and the adoption agreement). Together, they should contain everything there is to know about your retirement plan.

Who completes the adoption agreement?

Incorporating the features that have been chosen by the plan sponsor, the TPA will generally create the 401(k) adoption agreement. The new (or amended) retirement plan is active once the adoption agreement is executed.

Why Your 401(k) Adoption Agreement Matters

You know your adoption agreement is important.

For one, the standard 401(k) adoption agreement sets all the terms of your 401(k) benefit plan. Naturally, that’s a pretty important document.

In addition to setting these important plan terms, any information that guides how your plan functions, including information that forms the basis of your plan document, will be in the adoption agreement. This makes it an invaluable source of information.

Particularly during your annual 401(k) audit.

We know the word audit sends chills up your spine, but it always pays to be prepared.

During an audit, the auditor requires specific plan documents to be promptly handed over to them. Having the adoption agreement and your basic plan document readily available can help you be prepared if the DoL or Internal Revenue Service (IRS) come knocking. Always a good decision.

Now, we’ve spent enough time on the basics of the 401(k) adoption agreement. Let’s jump right into the specifics, and break down the document section-by-section.

Standard 401(k) Adoption Agreement Breakdown

Adoption agreements may vary one provider to another, but should follow a similar structure, containing basic and important plan information. In general, the adoption agreement is broken out into sections which outline the most important aspects of a plan.

Here they are (with a quick explanation):

Section A: General Information

As its name implies, this section is not very complicated. Section A includes straightforward and basic plan information. This means things like:

  • The plan name
  • Effective plan dates
  • Important basic features of the plan
  • Compensation and exclusions
  • Definitions

From here, we launch into the meat of the adoption agreement — all the different plan options and settings for your plan.

Section B: Eligibility

This section is devoted to the establishment of your plan's eligibility rules. For example, a plan might require that in order to be eligible, the employee must meet age requirements (however, in no event can the age to participate be higher than 21), and eligibility dates.

This section of the adoption agreement includes:

  • Eligibility Service Rules
  • Eligibility for Elective Deferrals and Voluntary Contributions
  • Eligibility for Matching and Profit Sharing Contributions
  • Eligibility for Service Computation Rules

After that, the document turns to section C.

Section C. Contributions — Safe Harbor and Elective Deferrals

Section C, appropriately, is devoted to contributions. Here the plan lays out rules governing safe harbor contributions and elective deferrals, enrollment, and more.

Overall, this section includes information on:

  • Safe Harbor Contributions
  • Elective Deferrals
  • Automatic Enrollment Testing
  • Elections Voluntary Contributions

With the Safe Harbor option, all squared away, we come to...

Section D: Contributions — Matching, Profit Sharing, and Other Contributions

Rules governing the making and matching of contributions to your 401(k) retirement plan will be laid out in this section of the adoption agreement. Here you’ll find information regarding employer contribution matching and profit sharing formulas.

The information in Section D includes:

  • Matching — Allocation Service
  • Matching — Formula
  • Profit Sharing — Allocation Service
  • Profit Sharing — Formula
  • Other Contributions

Section E: Vesting

Now, we come to section E, in which any and all vesting schedule details are laid out. This section is particularly useful for plan sponsors who are considering making discretionary employer contributions. The vesting schedule chosen will impact the proportion of an employer’s contribution that a terminated employee will be entitled to take with them when they leave.

Section E of the adoption agreement includes:

  • Vesting Service Rules
  • Vesting Schedules

Quickly following this section is Section F, which covers all your plans distributions:

Section F. Distributions

The rules governing plan distributions will be laid out here. This often covers everything from the normal standards of retirement distributions to cash out clauses.

Included in this section:

  • Normal/Early Retirement
  • Time and Form of Payment
  • Payments on Death
  • Cash Out
  • Required Beginning Date

Section G: In-Service Withdrawals

Withdrawals are frequently a major part of 401(k) ownership. In this section of the adoption agreement, the circumstances that apply to withdrawals are organized and chosen. This section ranges from the rules around hardship withdrawals to potential benefit plan loans.

Section G’s withdrawals include:

  • Vesting Status
  • Retirement/Hardship/Age
  • Other Withdrawals
  • Conditions/Limitations
  • Roth
  • Loans
  • Permissible Withdrawals

After this somewhat lengthy section, we arrive at section H.

Section H. Plan Operations and Top-Heavy

This section outlines the investment information of the plan, including important information like the permitted investments and trust details.

This section also includes:

  • Plan Operations
  • Statute of Limitations
  • Allocations

As we near the end of the adoption agreement, our sections become much shorter...

Section I: Miscellaneous

This section is fairly simple. More essential plan information, rules, and details that didn’t make it into the standard adoption agreement can be laid out here. Depending on the nature of your plan, this section may or may not be used.

Section J. Execution Page

Rounding out our adoption agreement is section J, the last simple page of the adoption agreement, and which mainly exists for signatures. Okay, entirely exists for the signature.

Required to put the adoption agreement into effect, this last page confirms all the information and selections made in the adoption agreement and gets your plan sponsor’s signature to back it all up.

All that’s included on this page is the plan sponsor’s signature (and the date).

Aaaannd you’re done!


Congratulations! You’ve tackled, one of the most important documents related to your 401(k).

Now, we get it. Your 40(k) adoption agreement might not be constantly on your mind. That’s okay. You’ve got other things to worry about, and after all, now you’ve got this quick reference guide to help you out. You’ve already taken the first step to 401(k) domination, don’t be intimidated by 401(k) administration again.

Next time you have to make a change to your 401(k) plan, (or you’d just like a refresher on this tedious document), we hope you think of this post. Better yet, bookmark it now to save yourself the effort.

Download the 2024 Safe Harbor Guide
Understand new rules for 2024, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.
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Evan Ross
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1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.