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Retirement Plan Documents

Prototype Plans
Prototype plans are pre-approved plans by the Internal Revenue Service under the Master and Prototype program. A Master and Prototype consists of a basic plan document and an adoption agreement. The basic plan document contains all the non-elective provisions. The adoption agreement contains the options which may be selected by elective provisions and options which may be selected by the adopting employer. A Master and Prototype may be standardized or non-standardized.

An employer who uses a prototype plan completes an adoption agreement to elect options which are detailed in a separate plan document. An employer has the choice of using a “standardized” or “nonstandardized” adoption agreement. If a standardized adoption agreement is properly completed, further IRS approval of the plan is usually unnecessary. A nonstandardized adoption agreement allows additional options, but is not automatically qualified. A nonstandardized adoption should be submitted to the IRS for approval.

An advantage of a prototype plan is that the initial cost may be lower since the plan is established by merely completing the adoption agreement, as opposed to drafting specific plan provisions. Similarly, when a plan is updated to reflect a change in tax laws, the document will be amended by the sponsor for all employers, eliminating the need to amend each plan separately. (However, a new adoption agreement for each employer will be necessary.) Finally, an employer who adopts a standardized plan usually incurs no cost in having the plan approved by the IRS. Employers who adopt a nonstandardized prototype plan pay a fee to the IRS, plus fees for a plan professional to complete and submit the approval application which may defeat one of the purposes of using a prototype plan in the first place.

The main disadvantage of adopting a prototype plan is that the employer is limited to the options set forth in the adoption agreement. In most cases the adoption agreement cannot be modified to fit unique needs or desires of the employer. Often, the initial savings achieved by adopting a prototype plan will be quickly offset by the cost to the employer of certain provisions included in the prototype plan. For example, a standardized prototype plan must provide contributions for all participants who have completed at least 500 hours during the plan year, even if they terminate before year end. If an employer contributes 10 percent of pay to a standardized plan, a terminated employee who earned $40,000 while working at least 500 hours during a plan year will receive $4,000. If the employer adopted an individual plan, contributions would not be required. In this situation, the prototype plan will be much more expensive if only one or two participants terminate employment. If an employer experiences considerable turnover, the additional expense can be tremendous.

Another disadvantage is that a prototype plan can be difficult to work with. The employer must review both the adoption agreement and the separate plan document to determine the actual terms of its plan. Both documents (and usually the summary plan description) will include provisions not applicable to that specific employer. Other disadvantages include: (i) the plan is often designed to protect the interests of the sponsor rather than the employer; (ii) the documents may be prepared and administered by individuals who are unfamiliar with legal requirements and design options for qualified plans; (iii) the employer may not have a local contact person to help with questions regarding the administration of the plan; (iv) the document is often provided at low cost to obtain the investment business, but savings may be offset by higher management or record keeping fees, and (v) a new plan has to be adopted each time the employer wants to change investment companies. While a prototype plan may be appropriate for an employer, initial cost savings must be weighed against some significant future costs and disadvantages.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:22 PM


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