Cost of Setting Up Profit Sharing Plan

[chris]

What is a reasonable range of the cost to set up a profit sharing plan including requesting a determination letter from the IRS? Do you have to request such a letter?

[Spencer]

Plan installation charges usually vary depending on the type of document used (standardized prototype, non-standardized prototype, volume submitter, individually designed, etc.). I've seen them range from $500 to $3000.

If you use a standardized prototype document, you are not required to file for individual determination with IRS.

[SMB]

Just to make a clarification to Spencer's post - a plan is never "required" to file a request with the IRS for a determination letter, although it is usually recommended (especially by those who get paid to prepare the submission packages...).

[Guest Ray Williams]

Any plan that our firm administors is required to obtain a determination letter, unless it is a Standardized Prototype.If you do not obtain a Determination Letter you cannot use APRSC as a correction method and you have no approval of any testing methods you mightuse in your plan designs.

[thepensionmaven]

I will have to agree with the above.

Don't forget, if the prospect never sponsored another plan that covers some or all of the same participants, that prospect can use a Standardized form plan and it need not be filed for approval. The client can rely on the issuing sponsor's approval letter (usually an investment house or insurance company.

98% of our clients have standardized form plans as they do not want to pay for a determination letter that, alas, once was free.

If you go Standardized, read the plan definitions of investments and trustee/custodian very carefully. Some, though not all, Standardized plans are proprietary and require use of that sponsor's products, and may require that that institution be the custodian of the funds or a trustee.

Nobody like to give away a "freebie", but if you are careful they are out there.

[mwyatt]

Just a few comments on standardized plans:

One, documents I have seen recently are now requiring some sort of annual fee to use the document.

Two, as previously stated, you may be tying yourself into one firm's set of investments. If the money leaves, you no longer have a document.

Three, make sure that the adoption agreement is completely and accurately filled in. If you miss one item, the IRS's contention is that you have NO document (especially ugly when discovered under audit).

Four, the reason a document is "standardized" is that every possible decision made is in the participant's favor. Extra costs in additional contributions that you could avoid with a nonstandardized document could very well overwhelm any savings on document preparation and submission fees.

Five, I have seen cases where a standardized document was used (generally set up by a CPA or broker with limited pension knowledge) that absolutely did not meet the requirements for nonfiling (i.e., prior plan, etc.)

A little anecdote is in order to illustrate the potential pitfalls of standardized documents. We had a client who sponsored a DB and a PS plan. Client left in early 90's and subsequent administrator used standardized documents for the TRA '86 restatements. The plans came back to us in 1997. Now these plans were top heavy and the client had consistently made a 15% PS contribution each year (more than covering TH minimums, right?). Wrong, as the standardized DB document stated that the plan would always be deemed to be top heavy and that the TH minimum accruals were required regardless of other plan contributions. We of course restated the document and submitted as soon as possible to eliminate these nonsensical provisions. However, that little provision in the prior DB document cost the employer over $50,000 in needless accruals to the rank and file and contributed mightily to the current underfunded status of the DB plan. IMHO, paying for a document that is thoughtfully drafted can save a client many times over the cost of a real document. I'm not advocating individually designed documents, but at least explore a nonstandardized prototype if your client has more than a couple employees; you may be surprised at how much negative savings a standardized prototype actually generates.

[richard]

In my humble and biased opinion:

Mwyatt's observations are entirely correct. We only use standardized prototypes when the provisions are acceptable (using these are only acceptable if there are no employees other than the owner).

And yes, we've taken over plans with standardized documents that have been screwed-up royally; the client has learned a costly lesson.

And that's the real message. What appears to cost zero may actually cost a lot. But, some have to find that out the hard way.