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February 17, 2009

What is a 401K adoption agreement?

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401K Adoption Agreement

401k adoption agreement is a section of a retirement plan document that allows the employer to choose the provisions that apply to its (employer sponsored) retirement plan.
401k adoption agreement signing the contract

What is a 401K adoption agreement?

401k adoption agreement is a section of a retirement plan document that allows the employer to choose the provisions that apply to its (employer sponsored) retirement plan. For instance, an employer may indicate in the adoption agreement that only employees who reach the age of 21 would be considered eligible to participate in the plan. For IRAs, the IRA owners complete the IRA Adoption Agreement

An adoption agreement is generally completed for qualified plans, SEP IRAs, SIMPLE IRAs and other employer-sponsored retirement plans.

The adoption agreement reflects specific choices made by the employer for the plan, including eligibility requirements, the types and amounts of contributions allowed, the allocation method for employer contributions, the vesting schedule applicable to employer contributions, and the distribution options. The adoption agreement is not the complete plan document and must be accompanied by a basic plan document, which provides in-depth details of how the plan should operate.

Adoption agreements are also completed by account owners for their traditional IRAs, Roth IRAs, Education Saving Accounts, and Health Savings Accounts. However, the information provided in these adoption agreements is usually limited to that which applies to the account owner.

Additional Helpful Information Associated with the 401K Adoption Agreement

  • By completing and signing the adoption agreement, the plan sponsor or account owner agrees to adopt the plan, and abide by the terms and conditions of the plan.
  • An employer is limited to elections that can be made in the adoption agreement. For instance, as provided under the Internal Revenue Code, the eligibility requirements that employees must meet in order to participate in a qualified plan cannot exceed the following:
      1. Age 21- for age
      2. 2 years of service [1 year of service for 401(k) plans]
      3. 1,000 hours per year, to constitute a year of service

Other requirements may apply to other areas of the plan.

  • Prototype plans and some volume submitter plans consist of both an adoption agreement and a separate basic plan document.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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