Prototypes

[rlb64]

Is there any benefit to using a standardized adoption agreement anymore as opposed to having the exact same provisions on a non-standard agreement?

[rcline46]

Oh, where to start.

Standardized Prototype - Cannot get a LOD, cannot fail discrimination, amended by Sponsor for all of those wonderful 'Good Faith' amendments we are doing.

Non-Standardized Prototype - Can apply for own LOD, availability of more options, some of which could cause a discrimination failure, can do Employer or Sponsor 'Good Faith' Amendments.

Volume Submitter - can apply for own LOD, more flexible than NS Prototype, can only do Employer 'Good Faith' amendments.

Individually Designed Plan - really should get a LOD, the world is your oyster, can only do Employer 'Good Faith' amendments.

The real question is what are you trying to accomplish now with the client, and which document type best suits the needs of the client. Be VERY careful with Standardized Prototypes you get from someone else as you may be limited in investments. WIth any prototype the client will end up with and Individually Designed Plan if they change providers as the document sponsor will no longer sponsor the document for the client. And that can be a bad thing when it comes to restatement time!

[Bob R]

If the employer only has 1 plan, then there is no advantage to using the standardized adoption agreement. It is less flexible and has more traps for the unwary. And, you can get the same scope of reliance using a nonstandardized plan if you make the same elections (use total comp, don't require EOY/1000 hours to share, don't exclude employees other than union EEs and non-res aliens).

If the employer has 2 plans, then currently (this goes away for EGTRRA) you can have 2 standardized plans that are paired with each other. This gives the employer reliance on the language coordinating the 2 plans for top-heavy and 415 (if 2 d/c plans). This is the ONLY substantive advantage of the standardized plan over the nonstandardized plan. From a practical perspective, some may view the standardized as being favorable b/c it's idiot proof. This may be advantageous for DB plans where it's easy to inadvertently create a non-safe harbor benefit forumla.

For most people, the standardized adoption agreements will be a thing of the past. However, they will continue to be used by those in the small employer retail type markets where the sales folks want something simple and familiar to them.

[Moe Howard]

The TPA administrative fees are cheaper for standardized plan, because a non-standardized plan requires more discrimination testing.

[Bob R]

That may be true - but the original question stated that the same elections would be made. I took this to mean that the elections made in the adoption agreement are elections that ensure there are no coverage and discrimination issues that need testing (which I stated in my prior post). The point is that if you make the right selections in the adoption agreement, you can end up with a plan that has the same reliance as a standardized plan and doesn't require any additional testing beyond what would be required with a standardized adoption agreement. Thus, the nonstandardized plan can give you everything a standardized plan can get you - plus it can cover those plans where more flexibility is needed. It's just that if you go with some of these additional options, you might have additional testing and possibly higher admin fees. For a TPA, there's no reason to offer both. For an institution, it may still be advantageous to offer a standardized adoption agreement that doesn't permit flexible plan designs thereby minimizing testing.

[Moe Howard]

Rob, the TPA will also charge to convert the nonstandardized plan document content into such a format that contains provisions that are not normally in the nonstandardized adoption agreement. It other words, it's expensive to convert a pigs ear into a silk purse.

[Kirk Maldonado]

I agree with the prior comments about the inadvisability of using a standardized document.

I once worked on an acquistion where the standardized plan of the target company required universal coverage of all members of the controlled group, but the target hadn't done that. (I think that all standardized plans have a similar requirement.)

I will freely admit that most employers that have standardized plans are not part of a controlled group. Also, my general impression (I don't do much work with prototypes) is that they were much larger (150+ employees) than most employers that use prototypes.

Nevertheless, this problem complicated the acquisition considerably, for a number of reasons.

[Jim Norman]

Kirk hits on the biggest problem with standardized prototypes, the mandatory coverage of CG/ASG members. I've had calls on several situations in just the last few months. Most recent example. Husband goes to local office of financial services firm back in 1999, sets up a money purchase on a standardized prototype for his business (corporation, he is sole employee.) But Wife also owns a business and employs 6 people. Community property state, no separate property agreement, they have a child under age 21 - IOW no way to avoid this is a CG. Naturally the MP plan was set at 25%.

Problems are numerous - no 5500 filings, contributions missed in some years, GUST non-amender, will fail discrimination and coverage tests. But the biggest problem is 7 years of contribution liability for wife's employees, it is over $250K - twice the assets of the plan. Arguably the ees could come after them for it. There is really no way to resolve this.

Of course SEPs are supposed to cover ASG/CG members as well, but IRS has so far declined to implement any enforcement activities in this area.