Don’t Just Sign Your New Adoption Agreement or Amendment

Recordkeepers will soon begin to distribute new Adoption Agreements or Adoption Agreement Amendments to their pre-approved plan customers. These important plan documents will reflect the provisions of the CARES Act, SECURE Act, and SECURE 2.0 Act. The document update packages may vary somewhat from recordkeeper to recordkeeper, but they will have one important element in common: every package will include a statement recommending that the employer have the documents reviewed by legal counsel before signing the new Adoption Agreement or standalone Amendment.

We strongly agree. There are at least three good reasons why employers should do this.

Preservation of the current plan design

Recordkeepers tend to do a good job preserving the design of customers’ retirement plans during restatement and other update processes. But mistakes do occur, and the significant number of changes being made as part of the CARES/SECURE restatement process may increase the risk of unintended changes to the written terms of the plan.

Some recordkeepers may have taken this opportunity to restructure their pre-approved documents, so the new Adoption Agreements employers receive may look different from the Adoption Agreements currently in effect. The moving parts will all still be there, but they may be in different places, and entirely new, defined terms will likely have been introduced. Many tax-exempt employers have gotten a preview of this through the Cycle 2 restatement for their pre-approved 403(b) plan documents. Even if the recordkeeper produces a hefty Amendment to incorporate the changes required by law and any optional changes selected by the plan sponsor, rather than a modified Adoption Agreement, new language will still be necessary.

This dynamic makes it more important than ever for an employer to devote substantial attention to a careful review of their new plan document package and engage legal counsel to help with that process. Many recordkeepers may not start distributing new plan document packages until this summer, with just six months or less remaining before the December 31, 2026, amendment deadline. So, employers should get going on this review as soon as they receive their new documents.

Opportunity to uncover potential administrative issues

Even in cases where the current plan design has been fully preserved in a new Adoption Agreement or standalone Amendment, a careful review is warranted because plan document updates provide an excellent opportunity to reaffirm that the employer’s administrative practices are aligned with the written terms of the plan document.

Every review will focus on confirming the accuracy of essential plan terms – the definition of “compensation,” service crediting rules, eligibility requirements, contribution formulas, allocation conditions for employer contributions, vesting requirements, participating employer coverage, and so on. But as part of the review, employers should also confirm that their payroll and HRIS systems are configured in ways to support and correctly apply those key plan terms. (Do the pay codes exclude items of compensation that are included in the plan’s definition of “compensation” or vice versa?)

In this regard, it’s important to keep in mind that Adoption Agreements and related Amendments operate in tandem with the recordkeeper’s Basic Plan Document. Many nuances in the defined terms and default provisions will be found in the Basic Plan Document, not in the Adoption Agreement or Amendment. Given the hard and soft costs of correcting operational failures, no employer should waste an opportunity to ensure that it is administering its retirement plan in accordance with its written terms.

Limited liability of recordkeeper

Finally, recordkeepers urge employers to have new plan documents reviewed by legal counsel because they put the burden on their customers to ensure that their plan documents reflect the intended design of the plan. And recordkeepers regularly remind their customers that they do not provide legal advice.

This is not to say that a reputable recordkeeper will not be willing to address a clear mistake that they have made in a way that is fair to the employer. But it may be difficult to prove that the mistake was entirely made by the recordkeeper and, more importantly, it may be difficult (if not impossible) to rectify a document error through a retroactive amendment.

So, if you don’t catch a mistake in a new Adoption Agreement or Amendment before signing it, your recourse against the recordkeeper is likely to be limited, and you may not have an opportunity to fully fix the mistake through a subsequent amendment.

If you need help in restating your retirement plan to comply with the CARES Act, SECURE Act, and SECURE 2.0 Act, or have any related legal compliance questions, please contact a member of Verrill’s Employee Benefits & Executive Compensation Group.