What is a 401(k) plan document?

6 MIN READEditorial Policy

Key Takeaways

  • A 401(k) plan document is essential for establishing and administering a qualified retirement plan.

  • Many components make up a 401(k) plan document, including plan design features.

  • The plan document may help educate participants and help a plan remain compliant with regulations.

What is a 401(k) plan document?

A 401(k) plan document outlines the terms and conditions of a 401(k) retirement plan. It breaks down how the plan will operate based on chosen plan design features, like eligibility requirements, contribution requirements, vesting schedules, and distribution rules.

What are the components of a 401(k) plan document?

Eligibility requirements: Eligibility refers to who can participate in the 401(k) plan, such as those who have worked a certain number of hours or have been with a company for a specific length of time.

Contribution limits: A 401(k) plan document will specify exactly how much can be contributed to the plan (as outlined by annual limits set by the IRS), which includes contributions from the individual as well as their employer.

Vesting schedules: A 401(k) plan document will explain the vesting schedule, or the timeline over which employees become entitled to some or all of the contributions made by the employer to their retirement plan. Generally, if a company offers a safe harbor provision or SIMPLE 401(k), employees must be immediately, 100% vested.

However, a company’s vesting schedule may require an employee to stay with the company for three  years before they become fully vested. If they leave the company before that three-year mark and the company is using a cliff vesting schedule, they will not be entitled to any of the contributions made by their employer.

If the company is using a graded vesting schedule, an employee can become partially vested, meaning they’re entitled to a portion of the employer’s contributions depending on the vesting schedule.

Plan distributions: A 401(k) plan document will tell you how and when an employee can receive distributions from the plan. Plan sponsors can choose the types of distribution (lump sum, installments, etc.), how old participants must be to start taking distributions, and the minimum amount required to request for distribution.

Plan loans: A 401(k) plan document will determine whether or not participants have the option to take loans from their 401(k) accounts.

Learn more about 401(k) plan design.

Why are 401(k) plan documents important?

Simply, a 401(k) plan document is somewhat of a home base for the plan. Plan sponsors, plan participants, and governing agencies like the IRS and DOL can see a comprehensive overview of how the plan will function.

But the importance of the plan document is more nuanced than that. There are several key reasons why it’s necessary for every plan.

Legal compliance

The IRS uses a plan’s 401(k) document to help determine if the plan complies with regulations and qualifies for tax benefits. Qualification for tax benefits depends on whether or not the plan meets certain requirements, including:

  • All eligible employees have access to the plan and are at least 21 years of age.

  • The plan limits contributions that can be made to the plan each year to comply with annual IRS limitations.

  • A vesting schedule has been established and is outlined in the plan document.

  • The plan does not discriminate in favor of highly compensated employees (HCEs) and passes annual nondiscrimination testing.

  • Distribution rules are clearly outlined in the plan document and have been communicated to all plan participants.

  • Reporting and disclosure requirements are met in a timely manner, including filing annual reports with the IRS and DOL as well as providing participants with a summary plan description (SPD).

Businesses that fail to meet these qualifications may sacrifice the ability for participants and plan sponsors to make tax-deductible contributions and grow plan investments on a tax-deferred basis.

Fiduciary responsibilities

A fiduciary is an individual or entity that’s bound by law to act in the best interests of another specified individual, group, or entity. In the context of retirement, a plan sponsor or administrator are  plan fiduciaries and are legally obligated to put the interests of plan participants and beneficiaries first.

Plan sponsors and administrators have a fiduciary responsibility to provide a comprehensive and understandable overview of the retirement plan, or the 401(k) plan document. 

However, that’s just part of the equation. The plan sponsor or administrator must also administer the plan in accordance with the terms of the plan document. A breach of this responsibility may result in harm to plan participants or beneficiaries.

401(k) plan document restatement

To ensure that a 401(k) plan document is always up to date and follows all regulatory changes, the plan will need to be restated on a regular basis.  A 401(k) plan restatement is a rewriting of the plan document to adopt certain required amendments. 

While a complete overhaul of this detailed document sounds cumbersome, the IRS only requires a 401(k) plan restatement every six years if the plan uses a “preapproved” plan document

For the IRS, preapproved plans (formerly known as prototype plans) take some of the legwork out of reviewing these documents because they’ve already been preapproved by the IRS. 

Human Interest helps with 401(k) plan restatements and other tasks related to plan administration and compliance. For more information, contact us today.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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