Parsing the language used to refer to the myriad of retirement plan options is a demanding task. Retirement programs are commonly referred to by the applicable section of the Internal Revenue Code and other attributes they share or avoid. Hence, the reference to non-prototype, which indicates the absence of provisions of a prototype plan.
Specifically, there were previously distinctions drawn between prototype plans, which shared characteristics across multiple employers and sponsors, and individual (or non-prototype) plans, either from a volume submitter or an individual design. The individual non-prototype plans required greater scrutiny for IRS approval but allowed for more customization.
Pre-Approved or Prototype?
Guidance issued by the IRS in 2017 eliminated the prior terminology (prototype, volume submitter, and master plans). It replaced them with the use of a pre-approved plan, which can refer to a standard or non-standard retirement program. Simultaneously, the IRS replaced references to sponsors and practitioners with plan providers.
Standardized pre-approved plans must be safe harbor plans, which means the offering employer will have minimal design choices and cannot modify the program. In return, approval of the pre-approved plan serves as approval to the employer that offers it.
In contrast, a non-standardized pre-approved plan is not necessarily a safe harbor, and the offering employer can modify it. Whether that offering employer can use the pre-approval letter as its approval will depend on how much of a safe harbor the plan offers and whether the offering employer has enacted changes to the program.
What is Safe Harbor?
In reference to a retirement plan like a 401(k), safe harbor means that the sponsor (employer) has designed the program in a way that enables it to pass the required IRS non-discrimination tests. The tests require that the sponsoring employer contribute the same percentage of salary to each employee's plan. The IRS checks to ensure that a program is not just a benefit for the employees at the higher salary levels. Safe harbors may involve matching or universal, non-elective contributions for eligible employees.
Master and Prototype Plan
A master and prototype plan (M&P) is the basic plan with non-optional provisions, plus an adoption agreement which the employer can customize, and a trust account or custodial account which the multiple employers using the M&P share. The M&P can be standardized or non-standardized, depending on the presence of the safe harbor provisions. If an M&P submitter has at least 30 unaffiliated employers that use the same plan, that submitter is considered a "mass submitter" and is entitled to expedited treatment from the IRS.
A Volume Submitter is Different
The Volume Submitter plan is a sample that is offered to the submitter's clients with some options for adopting. They can choose plan terms, an individual custodial or trust account, and some flexibility in the adoption agreement. Like the M&P mass submitter, the mass submitter VS plans submit applications on behalf of at least 30 separate practitioners (plan sponsors).
The IRS maintains a list of pre-approved plans, including defined contribution and defined benefit programs.