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BenefitsLink > Q&A Columns >

Q&A: Prototype Plans

Answers are provided by SunGard Corbel's Technical Consulting Staff

Differences Between Standardized and Non-standardized Plans

(Posted June 30, 1999)

Question 1: What are the differences between a standardized and a non-standardized prototype plan, and what is a non-standardized safe harbor plan?

Answer: Prototype plans usually come with two types of adoption agreements: standardized and non-standardized. Some prototypes also have a third type of adoption agreement: a non-standardized safe harbor adoption agreement. The differences between these types is the flexibility of plan design options and whether a determination letter needs to be requested to obtain assurance that the plan document satisfies the qualification requirements.

Standardized Adoption Agreements

Standardized adoption agreements are generally designed to automatically satisfy the coverage and nondiscrimination requirements of the Code. Therefore, the primary advantage of a standardized adoption agreement is that, in certain instances, an employer can adopt the plan and avoid filing with the IRS for a determination letter in order to obtain assurance that its plan document satisfies the qualification requirements.

However, not all employers adopting a standardized plan will have automatic reliance on the notification or opinion letter issued to the sponsoring organization. In general, an employer which maintains, or has ever maintained, another "type of qualified plan," in addition to the standardized plan must apply for a determination letter if it wants assurance that both plans are qualified. A "type of plan" refers to a profit sharing plan, money purchase plan, etc. For example, a money purchase plan which is converted to a profit sharing plan using a standardized prototype is currently not entitled to automatic reliance. It's possible this rule will be eliminated for terminated defined contribution plans under the GUST prototype program.

An exception exists where an employer maintains two different types of plans which are designed as "paired plans." Paired plans are defined as standardized plans of the same sponsor that have been specially drafted to include language which ensures that the appropriate top-heavy minimum contribution for the two plans is made and specifies which plan will be reduced in the event the Code Section 415 limits are exceeded. If an employer adopts two standardized "paired" plans, then the employer may be entitled to automatic reliance on the prototype sponsor's opinion or notification letter.

In a standardized plan, all employees must be eligible to participate except for union employees whose retirement benefits were the subject of good faith bargaining, and non-resident aliens receiving no US source income. Other classes of employees may not be excluded. For example, an employer cannot have a "salaried only" standardized plan. In addition, all employers who are members of a controlled group or an affiliated service group must adopt the plan A standardized plan is permitted, however, to impose the maximum statutory age and service restrictions for eligibility (e.g., for a 401(k) plan, age 21 and 1 year of service).

With a standardized adoption agreement, all compensation must be counted for benefit purposes. Commissions, bonuses, etc., may not be excluded. Exclusions are permitted on a non-standardized adoption agreement only, and then only if the plan is not integrated with Social Security.

All active participants employed on the last day of the plan year as well as participants who terminate during a plan year with over 500 hours of service, must share in allocations for the year. In addition, the contributions (or benefits for defined benefit or target benefit plans) must satisfy the uniformity requirements and one of the design based safe harbors described in the Code Section 401(a)(4) regulations.

Non-standardized Adoption Agreements

Many employers prefer the greater flexibility offered by a non standardized adoption agreement. However, an adopting employer of a non-standardized adoption agreement is not entitled to automatic reliance on the notification or opinion letter issued to the sponsor of the prototype. A determination letter is needed if the employer wants assurance that the plan document is qualified.

Unlike standardized adoption agreements, non-standardized adoption agreements can permit the exclusion of any class of employees provided the coverage requirements of Code Section 41 (b) (and, for defined benefit plans, the minimum participation test of Code Section 401(a)(26)) are satisfied.

Non-standardized plans are not required to use total compensation for allocation or benefit purposes unless the plan is integrated with Social Security (i.e., uses permitted disparity). However, if a plan does not use total compensation then the plan's definition must satisfy the nondiscrimination requirements set forth in the Code Section 414(s) regulations.

Non-standardized plans can require 1,000 hours of service and/or employment on the last day of the plan year in order to accrue benefits under the plan. However, it is important to note that such plans will need to be monitored to ensure that the coverage requirements of Code Section 410(b) (and, for defined benefit plans, the minimum participation test of Code Section 401(a (26)) are satisfied.

Non-standardized plans (other than target benefit plans) are not required to satisfy the design based safe harbor rules of the regulations issued under Code Section 401(a)(4). However, they must contain options permitting an employer to elect provisions which will meet the design based safe harbors.

Non-standardized Safe Harbor Adoption Agreements

In 1993, the IRS created a third type of adoption agreement, pursuant to Revenue Procedure 93-10. The non-standardized safe harbor adoption agreement has the same features as a non standardized adoption agreement except that the allocation or benefit formula must satisfy the uniformity and design based safe-harbor rules set forth in the Code Section 401(a)(4) regulations. The advantages of this type of adoption agreement are that there are less demonstrations required when submitting the plan to the IRS for a determination letter and it prevents an employer from incorrectly completing the adoption agreement and inadvertently creating a non-safe harbor plan. An adopting employer of a non-standardized safe harbor adoption agreement is not entitled to automatic reliance on the notification or opinion letter issued to the sponsor of the prototype. A determination letter is needed if the employer wants assurance that the plan document is qualified.


Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. The laws, regulations and court decisions in this area change frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the laws, regulations or court decisions that occur after the date on which that Q&A is posted.
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