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:
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.
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:
Plan sponsors/administrators may have little day-to-day need to reference an adoption agreement and may only refer to one when:
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.
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.
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.
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):
As its name implies, this section is not very complicated. Section A includes straightforward and basic plan information. This means things like:
From here, we launch into the meat of the adoption agreement — all the different plan options and settings for your plan.
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:
After that, the document turns to section C.
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:
With the Safe Harbor option, all squared away, we come to...
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:
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:
Quickly following this section is Section F, which covers all your plans 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:
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:
After this somewhat lengthy section, we arrive at section H.
This section outlines the investment information of the plan, including important information like the permitted investments and trust details.
This section also includes:
As we near the end of the adoption agreement, our sections become much shorter...
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.
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.
Give your employees more than just a 401(k), join the movement.