Setting Up a Qualified Plan

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If you're self-employed, you may set up a qualified plan even if you're the only person working in your business. You must adopt a written plan. You can design your own qualified plan to meet certain needs or use an IRS-approved master or prototype plan offered by a sponsoring organization.

Master or Prototype Plans

Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Master and prototype plans are made available by plan providers for adoption by employers (including self-employed persons).

Master plan:

Under a master plan, a single trust or custodial account is established as part of the plan for the joint trust of all adopting employers.

Prototype plan:

Under a prototype plan, a separate trust or custodial account is established for each employer.

The following organizations generally can provide IRS-approved master or prototype plans:

• Banks:
  • Savings and loan associations
  • Federally insured credit unions
• Trade or professional organizations
• Insurance companies
• Mutual funds

Individually Designed Qualified Plan

You may submit a determination letter application if your individually designed plan is:

• Seeking an initial favorable determination letter
• A terminating plan
• Seeking a ruling on a partial termination
• A plan that meets certain circumstances in IRS guidance (Rev. Proc. 2019-20)
  • Plan mergers – may submit applications of certain merged plans on a continuing basis

Two Steps in Setting Up a Qualified Plan

1. Adopt a written plan
2. Invest the plan assets

STEP 1: Adopt a written plan

• To qualify, the plan you set up must be in writing and must be communicated to your employees.
• The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization.
• The plan may also be an individually designed plan.
• The plan's provisions must be stated in the plan.
• It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code.

Mater or Prototype Plans:

Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS.

Mater and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals).

• Master plan:
  • Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of ALL adopting employers.
• Prototype plan:
  • Under a prototype plan, a separate trust or custodial account is established for EACH EMPLOYER.

Plan providers include:

• Banks, including:
  • Federally insured credit unions
  • Savings and loan associations
• Trade or professional organizations
• Insurance companies
• Mutual finds

STEP 2: Invest the plan assets

In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets.

• You can establish a trust or custodial account to invest the funds.
• You, the trust, or the custodial account can buy an annuity contract from an insurance company. Life insurance can be included only if it is incidental to the retirement benefits.
• You, the trust, or the custodial account can buy face-amount certificates from an insurance company. These certificates are treated like annuity contracts.

You set up a trust by a legal instrument (a written document). Professional help may be needed for this. You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. You do not need a trust or custodial account, although you can have one to invest the plan's funds in annuity contracts or face-amount certificates. If anyone other than a trustee holds these items, the contracts or certificates must state they are not transferable.