Broker Check

Dictionary of Terms

The following information is designed to provide a brief overview of common industry terms and is not intended to provide a comprehensive description, recommendation, analysis, purchase advice or professional recommendation.

Actual Deferral Percentage (ADP)

An anti-discrimination test that compares the amount deferred by highly compensated employees to the deferrals of non-highly compensated employees.

Administration

Plan administration refers to the periodic ministerial duties that are required to be performed to maintain a Qualified Retirement Plan. It does not include legal or investment services.

Allocation

The method which the employer's contribution to a defined contribution plan is allocated to participants.

Annual Audit

Federal law requires that all plans with more than 120 participants be audited by an independent auditor.

Annual Report-Form 5500

A document filed annually (Form 5500) with the IRS that reports pension plan information for a particular year, including such items as participation, funding, and administration.

Annuity

A contract between a customer and a life insurance company to save money for retirement. It is designed to provide a lump sum or periodic payments at specified intervals, usually after retirement.

Automatic Enrollment

the 401(k) plan provides that the employee is automatically enrolled at a default salary deferral rate.

Automatic Escalation

Annual Increase of the default salary deferral rate by 1% up to a maximum deferral percentage of Compensation.

Certificate of Deposit (CD)

Short- or medium-term, interest-bearing, FDIC-insured savings vehicle offered by banks and savings and loans.

Conversion

The process of changing from one service provider to another.

Cross-Tested Plan

A Cross-Tested Plan, also known as a New Comparability Plan, is a Defined Contribution Plan in which employer contributions are allocated to participants using a formula that satisfies nondiscrimination tests based on plan benefits rather than plan contributions.

Defined Contribution Plan

A Defined Contribution Plan is a Qualified Retirement Plan that is established by an employer on behalf of its employees for their retirement. An individual account is established for each participant. The amount that is available to the participant upon his retirement (or termination of employment as provided in the plan document) is based on the amount contributed to the participant's account and any income, expenses, gains, losses (including changes in market values), and forfeitures allocated to the account or balance. Defined Contribution Plan types include: Profit Sharing Plan, Traditional 401(k) Plan, Safe Harbor 401(k) Plan, Money Purchase Pension Plan, Target Benefit Plan and New Comparability (Cross-Tested) Plan.

Department of Labor (DOL)

The U.S. Department of Labor (DOL) is responsible for issues in relation to the workforce, including qualified plans.

Disclosure

Plan sponsors must provide plan participants access to certain types of information, including the summary plan descriptions, summary of material modifications, and summary annual reports.

Determination Letter

Document issued by the IRS formally recognizing that the plan meets the qualifications for tax-advantaged treatment.

Discrimination Testing

Tax qualified retirement plans must be administered in compliance with several regulations requiring numerical measurements. Typically, the process of determining whether the plan is in compliance is collectively called discrimination testing.

Distribution

Any payout made from a retirement plan.

Early Withdrawal Penalty

There is a 10% penalty tax for withdrawal of assets from a qualified retirement plan prior to age 55. This 10% penalty tax is in addition to regular federal and (if applicable) state tax.

EGTTRA

An acronym for Employee Retirement Income Security Act of 2001.

Eligibility

Conditions that must be met in order to participate in a plan, such as age or service requirements.

Eligible Employees

Employees who meet the requirements for participation in an employer-sponsored plan.

ERISA

ERISA is an acronym for the Employee Retirement Income Security Act of 1974. Plan sponsors are required by law to design and administer their plans in accordance with its statutes, including proper plan reporting and disclosure to participants.

Excludable Employees

The employees that may be excluded from the group being tested during 401(k) nondiscrimination testing.

Fiduciary

A responsible person, related to a retirement plan, who holds or controls property (investments) for the benefit of another (participant). ERISA also defines a fiduciary as any person who: exercises any discretionary control over the management of the plan or management or disposition of the assets, or renders investment advice for a fee or other compensation with respect to the assets of the plan, or has any discretionary authority or responsibility in the administration of the plan. A fiduciary must perform his duties in the interest of the participants and beneficiaries of the plan.

Forced Cash-Out

The distribution of assets from a qualified plan to a participant prior to retirement, typically occurring when a participant has a balance under $5,000 and leaves a company without requesting to have their assets rolled over into an IRA or into a new employer's plan. Qualified plan cash-outs are subject to federal withholding tax, and are subject to the 10% early withdrawal penalty if the participant is younger than age 55.

Forfeiture

Forfeitures are contributions that remain in a plan after a participant has terminated employment and has received the vested distribution.

Form 1099R

A form sent to the recipient of a plan distribution and filed with the IRS listing the amount of the distribution.

Form 5500

A form which all qualified retirement plans (excluding SEPs and SIMPLE IRAs) must file annually with the IRS.

Hardship Distribution

At the employer's option, a participant's withdrawal of their plan contributions prior to retirement. Eligibility may be conditioned on the presence of financial hardship. These distributions are taxable as early distributions and are subject to a 10% penalty tax.

Highly Compensated Employees (HCEs)

An HCE, according to the Small Business Job Protection Act of 1996, is an employee who received more than $80,000 in compensation (indexed annually, currently $90,000 in 2003) during the preceding plan year OR is a 5% owner in the company.

Individual Retirement Account (IRA)

A tax-deferred retirement account that allows you to contribute up to a legal limit per year. Contributions may be tax-deducted yearly and interest accumulates tax-deferred until the funds are withdrawn.

Lump-Sum Distribution

The distribution at retirement of a participant's entire account balance.

Matching Contribution

A contribution made by the company to the account of the participant in ratio to contributions made by the participant.

Money Purchase Pension Plan

A Money Purchase Plan is a Defined Contribution Plan in which the employer's required annual contributions are specified in the plan document, usually as a percentage of compensation.

Non-Highly Compensated Employees (NHCEs)

This group of employees is determined on the basis of compensation or ownership interest. See Highly Compensated Employees.

Non-Qualified Retirement Plan

A plan designed for a select group of employees.

Participant Directed Account

A plan that allows participants to select their own investment options.

Plan Administrator

The individual, group or corporation named in the plan document as responsible for day to day operations. The plan sponsor is generally the plan administrator if no other entity is named.

Plan Document

A plan document is the written legal evidence that describes the specific provisions of a plan. A plan is the arrangement under which employer and employee contributions, if any, are deposited with a trustee who is responsible for administering and investing the contributions and paying benefits.

Plan Loan

Loan from a participant's accumulated plan assets, not to exceed 50% of the balance or $50,000, whichever is less. This is an optional plan feature.

Plan Participant

Person who has an account in the plan and any beneficiaries who may be eligible to receive an account balance.

Plan Sponsor

The plan sponsor is the person or entity (generally the employer) who makes the plan available to its employees. As plan sponsor, the employer must accept some fiduciary responsibility for the management of the plan and its assets. Though many plan functions can be delegated to others, the employer will retain some responsibility and potential liability for the plan's operation.

Plan Year

The calendar or fiscal year for which plan records are maintained.

Profit Sharing Plans

A profit sharing plan is a plan that is established and maintained by an employer to share company revenues with employees or their beneficiaries.

Qualified Retirement Plan

A Qualified Retirement Plan is a plan maintained by an employer that provides retirement income to employees. The plan must meet extensive Internal Revenue Service requirements that allow for special tax treatment of contributions. Includes 401(k) and deferred profit sharing plans.

Rollover

A tax-free way to move funds from a qualified retirement plan into an IRA or other qualified plan within 60 days of distributions.

Roth IRA

An IRA which allows you, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. You make contributions with after-tax dollars, but withdrawals, subject to certain rules, are not taxed.

Safe Harbor

A Safe Harbor 401(k) Plan is a 401(k) Plan that includes specific notification and contribution features that eliminate the need to test the contributions for certain nondiscrimination features.

Service Provider

A company that provides any type of service to the plan, including managing assets, recordkeeping, providing plan education, and administering the plan.

Schedule SSA

A form that must be filed by all plans subject to ERISA Section 203 minimum vesting requirements. The schedule, which is attached to Form 5500, provides data on participants who separated from service with a vested benefit but were not paid their benefits.

SEP

SEP is an acronym for Simplified Employee Pension Plan. It is an IRA that is allowed to receive contributions from the IRA holder's employer. The employer is required to make contributions to the IRAs of all qualifying employees. There are significantly less administrative and fiduciary responsibilities than most other retirement plans.

SIMPLE

SIMPLE is an acronym for a Savings Incentive Match Plan for Employees. This plan may be structured as a SIMPLE IRA or a SIMPLE 401(k).

SIMPLE 401(k)

A SIMPLE 401(k) is a salary reduction plan geared for employers with 100 or fewer employees that requires less administrative paperwork than a 401(k) Plan and provides for limited employee and limited but required employer contributions. It is structured as a 401(k) Plan and must satisfy some rules governing qualified and 401(k) Plans.

SIMPLE IRA

A SIMPLE IRA is set up by a small employer for its employees. A SIMPLE IRA is a salary reduction plan geared for employers with 100 or fewer employees that requires less administrative paperwork than a 401(k) Plan and provides for limited employee and limited but required employer contributions. It is structured as an IRA. The employer will contribute some percentage of the employee's contribution.

Single 401(k) Plan

A Single 401(k) Plan, also known as a One-Person 401(k) Plan, is a 401(k) Plan that is established by a business that only employs owners and spouses.

Summary Plan Description (SPD)

A document describing the features of a employer-sponsored plan. The primary purpose of the SPD is to disclose the features of the plan to current and potential plan participants. ERISA requires that certain information be contained in the SPD, including participant rights under ERISA, claims procedures and funding arrangements.

Summary of Material Modifications

A document that must be distributed to plan participants summarizing material modifications made to a plan.

Target Benefit Plan

A Target Benefit Plan is a Defined Contribution Plan in which the employer's required annual contribution is an actuarial calculation based on the number of years remaining to the participant's retirement date and the target benefit under the plan.

Third Party Administrator (TPA)

A Third Party Administrator is an individual or firm who is engaged by the Plan Administrator to perform the ministerial administrative responsibilities of the plan.

Top Heavy Plan

A plan in which 60% of account balances (both vested and non-vested) are held by certain owners and officers of the company.

Trustee

A trustee may be a corporate trustee (trust company) or an individual as designated in the trust agreement. The trustee is responsible for holding and investing plan contributions and other financial aspects of the plan.

Trust Agreement

A trust agreement is an agreement that discloses the methods of receipt, investment, and disbursement of funds under a retirement plan. The trust agreement may be a separate agreement or may be included in the plan document.

Vested

A participant's right to receive company contributions that have accrued as a retirement benefit because he has met the service requirement of the plan. Employee contributions are always fully vested. Employer contributions are earned based on a vesting schedule established in the plan document.

Vesting Schedule

The structure for determining participants' right to company contributions that have accrued in their individual accounts. In a plan with immediate vesting, company contributions are fully vested as soon as they are deposited to a participant's account. Cliff vesting provides that company contributions will be fully vested only after a specific amount of time, and that employees who leave before this happens will not be entitled to any of the company contributions (with certain exceptions for retirees). In plans with graduated vesting, vesting occurs in specified increments.

401(k) Plan

A 401(k) Plan is a Defined Contribution Plan that has been established by an employer to enable employees to make pre-tax contributions by salary reductions into the plan, allowing employees to set aside tax-deferred income for retirement. Employers may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit sharing feature to the plan. Earnings accrue on a tax-deferred basis.

403(b) Plan

A retirement plan similar to a 401(k) plan, but one which is offered by non-profit organizations, such as public schools and some charitable organizations, rather than corporation.