Key Concepts in Plan Documentation

Smaller companies should consider the following in choosing the form of plan documentation:

·        Consider "prototypes" first
     Reinventing the wheel is seldom necessary.

·        Look for flexibility
     In plan design, limited choice means increased expense.

·        Plan for change
     Life is change, plans change, plan for change.

·        Choose the familiar
     Use the prototype document sponsored by your administrator.

·        Consider "prototypes" first

Reinventing the wheel is seldom necessary. Prototype plans are plan documents that have been divided into two pieces, a basic plan document and an adoption agreement. The provisions of the plan are chosen by selecting from choices in the adoption agreement (including blanks to be filled in), which in turn refer to more detailed explanations in the basic plan document. Today, with a good prototype document, most creative plan designs can be accomplished without custom drafting of a "from scratch" plan document. Prototypes are generally submitted to the IRS for pre-approval of most issues. Volume submitter plans are a type of plan that uses standardized language, in a single plan document. The general form of the plan is also pre-approved by the IRS. The costs associated with maintaining a prototype plan are, in our experience, generally lower, without any real loss of flexibility.

·       Look for flexibility

In plan design, limited choice means increased expense. There are two "styles" of prototype plans: simple and flexible. While simple might sound appealing, this approach is really only of benefit to the person providing the prototype. If the choices are limited to a few, then sales agents and persons with little knowledge or training can complete them without a likelihood that the plan will fail to be qualified. These are not used by professionals, however, because the limited choices can dramatically increase the overall cost of the plan, and keep the plan from meeting other objectives. In fact, the more choices available, the easier it is to match the plan design to employer circumstance and create a plan that will be simple to understand and administer.

·       Plan for change

Life is change, plans change, plan for change. If a plan amendment is hard to accomplish or expensive, most employers will be reluctant to make it. This often means that the plan will progressively depart from the desired results, as circumstances and goals evolve. For this reason, ease of amendment is an important factor in choosing a plan document. We strongly favor the use of prototypes, which can be amended by simply changing selections in the adoption agreement.

·        Choose the familiar

Use the prototype document sponsored by your administrator. Subject to the comments voiced above concerning the choice of a plan document, familiarity of the administrator you hire with the document will aid greatly in getting quick answers to your questions, and in making sure that plan administration operates smoothly. If you have a staff that is intimately familiar with your current document, then this may balance against this point, but it will usually be to your benefit to shift (outsource) as many of these responsibilities as possible.