Oct 14, 2021

New 401(k) Adoption Agreements on the Horizon: Pitfalls for the Unwary

401(k) MEP

Employers that use an IRS-approved form 401(k) or profit-sharing plan document are required to adopt updated IRS-approved adoption agreements no later than July 31, 2022.  Most plan recordkeepers and other plan document providers are currently in the process of updating their clients’ plans, but this would be a good time for any employers who have not heard from their vendors about these required updates to reach out and ask about the timeline for their document updates.

In addition, it is important for employers to carefully review the updated documents prepared for their plans.  Simply “rubber stamping” the updated document package from the vendor is likely to result in compliance failures and could lead to costly corrections and penalties.

Following are some of the issues that we have already seen in the current round of document updates:

  • Plan Terms. We have seen numerous instances in which the new adoption agreement produced by the recordkeeping firm did not correctly reflect existing plan terms.  This may happen (i) due to errors in generating the new document, or (ii) because the new adoption agreement has different options than the prior document.  In any event, it is critical to ensure that the new adoption agreement has been completed correctly.
  • New Discretionary Match Requirements. If the plan has discretionary matching contributions, the new document will require specific formal documentation and participant communications regarding the discretionary match.  Because of this change in the plan document, it will be important to ensure these new documentation and communication obligations are satisfied.  This appears to be a change that the IRS has required in all preapproved plans, so any new adoption agreement will very likely have this change.
  • Modified Claims Procedures. Due to an increase in lawsuits, vendors have tried to tailor their form language regarding participant claims and lawsuits.  However, some of these changes have been for the worse.  The new claims language that is being circulated by one large vendor arguably expands participant’s rights to file lawsuits against the plan and its fiduciaries.  The new claims language in any new plan document should be reviewed to make sure it is appropriate and consistent with the plan’s actual procedures and, if not, to determine whether there is a process through which this provision can be modified.

To the extent the plan’s claims procedure can be modified, it may also be helpful to add, modify or clarify any claims limitations periods, specific venue requirements and, where appropriate, arbitration provisions.  Carefully crafted claims procedures can be a very useful protection for plans and their sponsors and fiduciaries.

  • Required Administrative Procedures. Some new documents are removing specific details about some plan features (such as automatic enrollment) and requiring that these details instead be included in separate written administrative procedures.  While this may allow for more flexibility, if those procedures are not established, then the plan could be out of compliance.
  • Separate Trust Agreement. It was typical of the older form documents to include the trust agreement in the body of the document.  The new form documents now have separate trust agreements.  In some cases, the trust language is the same as what formerly was in the form document; and in other cases, the language contains different terms.  The trust agreement should be reviewed to ensure the terms are acceptable and do not transfer unwanted responsibilities and/or liabilities to the plan sponsor or named fiduciary.

There are many 401(k) service providers and many different IRS-approved form documents.  These issues are just a few of the issues that we have seen.  It is possible that the new adoption agreement for your plan could have additional issues.

For help reviewing your new adoption agreement or for additional information about this process in general, please contact your Employee Benefits and Executive Compensation counsel at Smith Gambrell Russell LLP.

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