Once an employer has decided on the type of plan that is best suited for its purposes, it must adopt a plan document. An employer may choose from the following plan document options: An individually designed plan A Master and Prototype plan (M&P plan) A Volume Submitter plan A plan must be a definite written program that is communicated to employees (Treasury Regulation section 1.401-1(a)(2)). Effective date of plan. The plan may not be made effective earlier than the first day of the employer's tax year in which the plan was adopted. In other words, an employer may adopt the plan document on the last day of its tax year, with an effective date retroactive to the first day of that tax year, but not any earlier. The 401(k) feature of the plan, however, may not be made effective earlier than the adoption date. In other words, employees may not make elective deferrals nor make deferrals from previously earned compensation any earlier than the date the 401(k) feature was actually adopted. Requesting a determination letter. To ensure that the form of the plan document complies with the Internal Revenue Code, the plan sponsor may request that the IRS review the document and issue a favorable determination letter on its qualified status. Requesting a determination letter is not legally required; nevertheless, many plan sponsors choose to do so. Sharing information with employees. Eligible employees need to be notified about the plan, including who may participate and how it works. This information is generally provided to them in a Summary Plan Description or SPD. In addition to the Summary Plan Description, the plan administrator must automatically give participants a copy of the plan's Summary Annual Report each year. This is a summary of the Form 5500, Annual Return/Report of Employee Benefit Plan, that most plans must file with the Department of Labor. The Summary Annual Report must be provided at no cost. Participants may request a copy of the plan's Form 5500 in its entirety. The participant may be charged a reasonable fee to cover the cost of providing this information. Participants in the plan must also receive regular notification about their plan accounts and must be notified of any significant changes in the terms of the plan. If the terms of the plan are changed, participants must be informed of those changes, either through a revised Summary Plan Description, or in a separate document, called a Summary of Material Modifications. Trusts and trustees. 401(k) plans are funded through a trust established to hold and invest the plan's assets. At least one trustee is appointed to have responsibility for the activities of the trust and its assets. This is a serious responsibility with considerable potential for liability. Trustees might include the business owner, an employee, or a financial or trust institution. Contributions made to the trust. The employer makes contributions to the trust for the amounts of the elective deferrals made by the plan participants. The Department of Labor requires that the contributions must be made on the earliest date that the employer is able to segregate the amounts from the employer's general assets but no later than the15th day of the month following the month in which the participant would have received the amount in cash if not for the deferral election. This can usually be done on the date that the employer pays payroll taxes. Keep in mind that the rule regarding the 15th day of the following month does not provide a safe harbor for depositing deferrals. Rather, it sets the maximum deadline. If the employer does not make the deposits timely, the failure constitutes a prohibited transaction. Prohibited transactions are subject to a 15% excise tax, payable with the filing of Form 5330, Return of Excise Taxes Related to Employee Benefit Plans. More information on Prohibited Transactions can be found in Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Publication 560. Contributions made by the employer to match part or all of the participant's elective deferrals may be made at the time the elective deferrals are contributed or later, but in no event later than the due date of the employer's federal income tax return, including extensions. Contributions made by the employer that are not tied to elective deferral amounts must also be made no later than the due date of the employer's federal income tax return, including extensions. Employee elective deferrals. In general, employees participating in the plan must inform the employer of how much of their wages they are electing to defer and when they want the deferrals to start. A participant may only make that election before the wages would otherwise be paid. In some cases, 401(k) plans may include an automatic enrollment feature. Under this feature, an employee's pay can automatically be reduced by a fixed percentage or amount and that amount contributed to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage or amount. For more information about the automatic enrollment feature, refer to Income Tax Regulations Section 1.401(k)-1(A)(3)(ii).