Dale R. Vlasek
McDonald Hopkins LLC
P: (216) 348-5452
E: dvlasek@mcdonaldhopkins

*Please click here to view a downloadable .pdf of this article.

Generally, an employer can utilize any of three different types of plan documents for its qualified retirement plans. Which type to use depends on the complexity of the design of the employer’s plan.

Prototype Plan

The simplest type of plan document is what is called a “Prototype Plan.” Prototype Plans are usually sponsored and maintained by investment entities such as insurance companies, mutual fund companies, and brokerage houses. Many third party administrators and law firms also sponsor Prototype Plans. Normally, a Prototype Plan consists of two documents. The first is the Basic Plan Document which contains the boilerplate language required of all plans as well as the administrative language needed to operate the plan. The Basic Plan Document is the same for all  employers who chose the Prototype Plan to serve as their plan document. The second document is the Adoption Agreement. The Adoption Agreement consists of blanks which require information about the employer adopting the Prototype Plan and the options which the employer can select to tailor the design of the plan to fit the employer’s particular needs. The tailoring is only limited by the options or choices available on the Adoption Agreement. Some Adoption Agreements are expansive with multiple options which facilitate a great number of choices. Others are rather narrow with a limited selection of options.

The sponsor of the Prototype Plan has submitted the Basic Plan Document and its Adoption Agreement to the Internal Revenue Service (“IRS”) and the IRS has issued the sponsor a determination letter on the Prototype Plan. An employer that adopts a Prototype Plan is entitled to rely on the letter issued to the Prototype Plan Sponsor regarding the document’s compliance with the language and provisions which a qualified plan is required to contain.

The Prototype Plan Sponsor has the ability to amend the Basic Plan Document and the Adoption Agreement to ensure compliance with the Internal Revenue Code or to add new feature or options. The Prototype Plan Sponsor cannot amend the selections made by the employer on the Adoption Agreement without the employer’s involvement. However, there may be instances where the law has changed and the Prototype Plan Sponsor may be required to eliminate an option on the Adoption Agreement because it is no longer permitted under the Internal Revenue Code.

Volume Submitter

The next type of plan document is a Volume Submitter document. This document is usually provided by law firms and third party administrators. These documents are designed to permit significantly more customization than a Prototype Plan Document. These documents require much more drafting work but permit employers many more options than a prototype. By way of comparison if a Prototype Plan can be characterized as an “off-the-rack” suit then a Volume Submitter is more like a custom-tailored suit.

The difference between a Volume Submitter document and the third type of document, an individually designed plan document, is the fact that the Volume Submitter sponsor has prepared large blocks of language which contain the boilerplate provisions the IRS requires in qualified plans. The language has been sent to the Internal Revenue Service for review and the Internal Revenue Service has issued the Volume Submitter sponsor a letter indicating the Internal Revenue Service’s approval of the language.

Unlike a Prototype Plan, the employer who uses a Volume Submitter plan document does not have complete reliance on the letter given to the Volume Submitter sponsor. The employer should consider applying for its own letter. However, because the employer is using a Volume Submitter Plan document the process is simpler. When the Volume Submitter Plan document is submitted, the determination letter request identifies the document as a Volume Submitter Plan document and highlights the differences in the document being reviewed from the previously approved language. The IRS reviewer then focuses his or her attention on the different language. In theory, the process should be much smoother and much faster.

Many Volume Submitter Plan sponsors have retained the authority to amend the boilerplate language as needed to keep the plan document compliant with tax law changes. The changes made are often very technical and do not require or even permit employer choices. This can make the updating of documents much easier and less costly.

Individually Designed Plans

The third type of plan document is what is called an individually designed plan document. This type of plan document is most frequently used by large employers which desire a document unique to them and their specific plan design requirements. Because these documents do not utilize pre-approved language like the Prototype Plan Documents or the Volume Submitter Plan documents the employer is always best advised to receive its own determination letter. The determination letter process is a little more complicated and more costly because the IRS reviews all language in the document for compliance with the Internal Revenue Code.

In addition to the plan documents for larger employers, certain types of plans are considered individually designed because they either are plan types the IRS does not recognize as able to use a Prototype Plan Document or Volume Submitter documents or incorporate unique design features. The best example of the first type is an Employee Stock Ownership Plan (ESOP). ESOPs are considered individually designed plans. The simple reason is that the IRS has never permitted ESOPs to be Prototype Plans or Volume Submitter Plans.

An example of the second type was cross-tested plans. Until recently, cross-tested plans were not permitted in Prototype Plans or Volume Submitter Plans. However, now cross-tested formulas can be included in plans in Prototype Plans if the Prototype Plan was designed to include that as a choice in the Adoption Agreement.

Finally, an employer can take a Prototype Plan document and intentionally or perhaps inadvertently turn it into an individually designed plan. If the employer wants a feature or option for its plan that is not one of the choices available on that Prototype Plan’s Adoption Agreement and if the employer amends its plan to add that choice as an option, then the Prototype Plan ceases to be a Prototype Plan and becomes effectively an individually designed plan. This is true even if the choice is permitted by the Internal Revenue Code. The fact that it is not part of the pre-approved language of that particular Prototype Plan makes the selection of that choice sufficient to remove the IRS “approval” of that document.

Conclusion

Employers have a number of choices in what type of document to use. Which one to use depends on the employer’s need for options and customization. If an employer does not need a very complicated or sophisticated plan design, a Prototype Plan will be more than adequate. The more sophisticated the design, the more there is a need for a more sophisticated document like a Volume Submitter or individually designed plan document.

In the end, what the employer wishes to accomplish with its retirement plan should determine the plan design and consequently the appropriate document for that plan.

©McDonald Hopkins LLC (2009) Dale Vlasek