IRA Plan Agreement: Model vs. Prototype
By Lisa Walker, CISP, CHSP
Trust the Experts Get ready for an expected IRA plan document update, the first of its kind in 20 years.
When your organization first began offering IRAs, you decided to use either the IRS model document or a prototype document as your required IRA plan agreement. Now—with the IRS expected to release new IRA model documents soon—you may want to revisit that decision to make sure it’s still the best one for your organization. Knowing the difference between the model and prototype, and the pros and cons of both, may help.
A Plan Agreement Is Required
Why must an IRA have a plan agreement in the first place? The “A” in “IRA” stands for “arrangement.” An IRA is a legal arrangement that allows individuals to take advantage of certain tax benefits while saving for retirement. And the Internal Revenue Code requires a written agreement—the IRA plan agreement—between the IRA owner and the IRA trustee, custodian, or issuer (the financial organization) holding the assets. Once the plan agreement is signed by both parties, the IRA is created; without a signed agreement, an IRA does not exist.
The IRA plan agreement also sets forth the terms and conditions specific to the type of IRA (i.e., Traditional, Roth, or SIMPLE) and contains both the IRA owner’s and the financial organization’s responsibilities. Although IRA plan agreements may differ based on whether the financial organization acts as a trustee, custodian, or issuer, they are quite similar because the IRS requires certain language in the documents.
IRS Model Document
The IRS provides IRA model forms that satisfy the basic statutory requirements for IRAs. Each IRS model form contains specific language based on the requirements for that type of IRA. The IRS currently offers the following model forms. (Note that there is both a trust and custodial account model document for each type of IRA—and that an annuity version is available only for the Roth IRA.)
Form 5305, Traditional Individual Retirement Trust Account
Form 5305-A, Traditional Individual Retirement Custodial Account
Form 5305-R, Roth Individual Retirement Trust Account
Form 5305-RA, Roth Individual Retirement Custodial Account
Form 5305-RB, Roth Individual Retirement Annuity Endorsement
Form 5305-S, SIMPLE Individual Retirement Trust Account
Form 5305-SA, SIMPLE Individual Retirement Custodial Account
The language in the IRS model documents generally cannot be altered: the text in Articles I–VII for a Traditional IRA and I–VIII for a Roth IRA must stay the same. Only the last article—where the IRS allows for unlimited additional language—can be customized. This is where your financial organization or document provider can address items not covered in the previous articles, such as definitions, responsibilities, distributions, beneficiary options, excess contributions, and IRA termination procedures, as long as the customized language does not conflict with Internal Revenue Code requirements.
Because of its preapproved content and flexibility, the IRS model form is an inexpensive plan agreement option, which is a primary reason many financial organizations choose to use the model form—or a document based on the model form.
Prototype Document
Some trustees and custodians may find that the IRS model form is too restrictive and so may decide to use a prototype IRA document—a specially drafted IRA plan agreement. (Or if your organization issues Traditional or SIMPLE IR annuities, it must use a prototype.)
Using a prototype document allows your financial organization to do something that is not possible with an IRS model form: use one document to establish either a Roth or Traditional IRA. The IRS simply does not offer such a combined model document. But just as there are benefits to using a prototype for an all-inclusive IRA document, there may be some drawbacks. These days, more documents are generated and delivered electronically, reducing the potential of human error (e.g., providing clients with the wrong type of IRA plan agreement). So your organization may find less need for a combined document. In fact, receiving a plan agreement that covers the rules for both Traditional and Roth IRAs may confuse clients.
Regardless of the reason, choosing a prototype document does allow your organization to customize its overall plan agreement. It can be laid out differently from the model document—there are no set articles—as long as the language in the prototype is consistent with federal laws. In fact, the IRS provides a listing of required modifications, or LRMs, containing all of the topics that must be covered in the prototype document.
It’s recommended that a prototype document be submitted to the IRS for approval after it’s drafted, which requires paying an IRS submission fee. If the IRS grants approval, it will be in the form of an opinion letter, which allows your financial organization and its clients to rely on the document’s contents. IRS approval means that the language of the prototype document conforms with the tax laws and that it qualifies as an IRA plan agreement.
The IRS approval process typically takes three to six months, with longer wait times becoming common. Each time IRA laws change or any of the information contained in the prototype document needs to change, an amendment to the document may be needed and, thus, a new opinion letter may be necessary. Keep in mind that the IRS only identifies when its LRM language must be updated so if the language in a prototype document is highly customized, it may require more effort on the part of your financial organization to monitor for law changes and determine when a document needs to be amended.
Trust the Experts
Your organization should carefully consider which type of IRA document is best for your business. Some forms providers or document experts, such as Ascensus, offer model and prototype document versions of IRA plan agreements.
Ascensus’ documents are drafted by expert, in-house ERISA staff with decades of combined experience specializing in IRA documents. They continually monitor federal government requirements and carefully design and revise documents as needed to meet these requirements. Whichever type of document you choose, all the work is done for you, saving your organization time and expense.
Trust the experts. Schedule a call with your Ascensus sales representative or contact Ascensus at 800-346-3860 to learn more or to discuss which option will be best for your organization.
