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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.
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
corporations.
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