Nonstandardized vs. Standardized

[Guest Donna Hearn]

what is the difference between flexible nonstandardized

safe harbor 401(k) profit sharing plans and flexible

standardized 401(k) profit sharing plans?

[Bob R]

Under the IRS rules (Rev. Proc. 2000-20 or the predecessor guidance from Rev. Proc. 89-9 or 89-13) there are basically 3 differences. However, depending upon the drafter of the adoption agreements, there could be other differences. For example, the use of the term "flexible" in the names of the adoptions agreements is a term added by the drafter -- it's not a term used by the IRS.

The differences mandated by the IRS fall within 3 categories. The reason for the differences is because a standardized generally may not include any provision that has the potential of being discrminatory or violating the coverage rules. The 3 "general" differences are:

- Who must be covered. In a standardized plan, the only class of employees that you can generally exclude are union employees and non-resident aliens. So, you can't exclude any other classes, nor any employees that are members of a controlled group or affiliated service group.

- What compensation must be used. In a standardized plan, you must use a safe harbor definition of compensation. So, you can't exclude items such as commissions or bonuses.

- Who must share in allocations. In a standardzied plan you can't require that a participant be employed at the end of the year or complete year of service to recieve an allocation or accrual. (You can still require 1 year (or 2 years with full vesting in a non-K plan)/ and 21 to become a participant.

Those are the 3 primary differences. But, as mentioned, the actual adoption agreements that you have could have other differences depending upon how they were drafted.