Prototype vs. Customized Plan Documents: Which Is Right for Your ERISA Plan?

When managing an employer-sponsored ERISA health or retirement plan, one of the key decisions you'll face is choosing between a Prototype and a Customized plan document. Understanding the difference between these two options is crucial to ensuring your plan meets your organization's needs while maintaining compliance with ERISA regulations.

What Is a Prototype Plan Document?  

A Prototype plan document is essentially a "ready-made" plan that’s been pre-approved by the IRS. These plans are designed by financial institutions, insurance companies, or third-party administrators (TPAs) to provide a streamlined, cost-effective solution for employers[1]. The main advantage of a Prototype plan is its simplicity: it comes with a set of pre-determined options that cover the basics of plan design, such as eligibility requirements, contribution limits, and vesting schedules[2]. Employers can adopt the Prototype plan with minimal customization, which means fewer decisions to make and less paperwork to handle[3].

Because Prototype plans are pre-approved, they offer a faster and more straightforward implementation process[4]. They also reduce the risk of IRS scrutiny since the plan’s structure has already been vetted for compliance[5]. However, this ease of use comes with limitations. Employers have little room to tailor the plan to their specific workforce or strategic goals, as the plan’s features are largely fixed[1]. This can be a downside for companies with unique needs or those looking to offer more specialized benefits to their employees[2].

What Is a Customized Plan Document?  

A Customized plan document, as the name suggests, is tailored to the specific needs of the employer. Unlike the one-size-fits-all approach of Prototype plans, a Customized plan allows for greater flexibility in terms of plan design, participant eligibility, contribution formulas, and other critical aspects[4]. This flexibility enables employers to align their plan more closely with their business objectives and employee demographics[1].

However, with greater flexibility comes increased responsibility. Customized plans require more time and expertise to develop, as they must be carefully crafted to ensure compliance with ERISA and IRS regulations[3]. This often involves working closely with legal counsel, benefits consultants, or TPAs to draft the plan document, select the appropriate features, and ensure everything is in order[5]. Additionally, Customized plans are subject to individual IRS approval, which can be a more time-consuming and potentially costly process[4].

Choosing the Right Plan Document for Your Organization   

The decision between a Prototype and a Customized plan document ultimately depends on your organization’s specific needs, resources, and long-term goals. If your company is looking for a straightforward, cost-effective solution that meets basic compliance requirements, a Prototype plan may be the best choice[2]. It simplifies the administrative burden and reduces the risk of compliance issues, making it an attractive option for smaller companies or those with limited internal resources[5].

On the other hand, if your organization has unique needs or if you’re seeking to design a plan that offers particular advantages to your employees, a Customized plan document may be the better option[1]. While it requires more effort and expertise to create and maintain, the benefits of a plan that’s perfectly aligned with your company’s objectives can outweigh the additional complexity[3].

In short, choosing the right plan document is about balancing the need for simplicity and cost-effectiveness with the desire for flexibility and control. By carefully considering your organization’s needs and consulting with experts as necessary, you can make an informed decision that supports both your business goals and your fiduciary responsibilities.

For support in managing your fiduciary responsibilities, visit Fiduciary In A Box.  

© 2024 Fiduciary In A Box, Inc. All rights reserved

References

[1] Employee Benefits Law Group. (2017, February 7). Ready-To-Wear - Some Distinctions Between "Customized" And "Off-The-Rack" Benefit Plans. Retrieved from https://www.employeebenefitslawgroup.com/ready-to-wear-some-distinctions-between-customized-and-off-the-rack-benefit-plans/ 

[2] Internal Revenue Service. (2024, March 1). Types of Pre-Approved Retirement Plans. Retrieved from https://www.irs.gov/retirement-plans/types-of-pre-approved-retirement-plans 

[3] Walker, L. (2021, May 20). IRA Plan Agreement: Model vs. Prototype. Ascensus. Retrieved from https://thelink.ascensus.com/articles/2021/5/19/ira-plan-agreement-model-vs-prototype 

[4] Erickson, C. (2016, December 20). Identifying Your 401k Plan Document (and When to Update). Wiss. Retrieved from https://wiss.com/what-type-of-401k-plan-document-do-i-have-and-when-do-i-need-to-update-it/ 

[5] FIS Relius. Prototype Plans - FIS Relius. Retrieved from https://www.relius.net/products/ptp_whatitis.aspx