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401kTV Glossary of Retirement Industry Terms

 

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Term Description
ACP test: See: Actual Contribution Percentage Test
Actual Contribution Percentage (ACP) Test: An annual test to determine if employee after-tax contributions and/or employer matching contributions made to the plan during a particular plan year favor highly compensated employees. See also: Nondiscrimination testing
Actual Count: A method of measuring and crediting years of service based on the actual number of hours an employee serves. In this method, all hours must be accounted for. See also: Year of service
Actual Deferral Percentage (ADP) Test: A test that is performed each plan year on all 401(k) plans to ensure that employee pre-tax contributions (deferrals) do not discriminate in favor of highly compensated employees. See also: Nondiscrimination testing
Actuary: A professional mathematician who determines the amount of annual contributions required by defined benefit plan sponsors to fund benefits provided by defined benefit plans. The actuary also determines the amount of the contribution that is tax deductible.
Adjusted book value: The purchase price of each plan asset, subsequently adjusted for dividends, which is reported annually on the Form 5500. See also: Form 5500 Series
Adoption agreement: Part of a master or prototype plan containing the plan features to be offered in the plan. The plan sponsor selects plan features and signs the agreement to adopt the plan. See also: Prototype plan
ADP test: See: Actual Deferral Percentage Test
Advice: Department of Labor (DOL) regulations define investment advice as providing advice as to the value of securities or other property, or making recommendations as to the advisability of investing in, purchasing or selling securities or other property for a fee, and providing such advice on a regular basis, pursuant to a mutual understanding (written or oral) that the advice will serve as a primary basis for investment decisions relating to plan assets and is particularized to the specific plan.
Affiliated service group: An aggregation of two or more service organizations whose relationship requires that they be treated as a single employer for certain qualified plan purposes, including nondiscrimination testing, limitations under IRC Section 415, top heavy requirements, vesting, participation, and coverage testing. Often, an affiliated service group is comprised of partnerships that have been established by professionals or professional corporations.
After-tax contribution An employee contribution made with money that has already been taxed.
Age Weighted Contribution Formula A formula for allocating employer contributions where points are awarded to older employees, generally resulting in higher contributions for older employees.
American Jobs Creation Act (AJCA) of 2004 Added new section to the Internal Revenue Code, 409A, which affects amounts deferred after 2004 under nonqualified deferred compensation plans. The code now provides specific rules regarding deferral elections, distributions, and funding mechanisms.
Annual Additions Limitation (IRC Section 415) Refers to the limit on contributions and forfeitures made each year to a participant’s account in a defined contribution plan.
Annual Compensation Limit The annual compensation limit, as outlined in IRC Section 401(a)(17) is the maximum amount of compensation that may be taken into account under qualified and certain other employer-sponsored plans.
Annuity A benefit paid in the form of a series of periodic payments, usually monthly. The payments must be made at least annually and can be variable or fixed.
Asset Something owned that has value.
Asset custodian The entity responsible for the physical maintenance and safe keeping of the assets in the plan.
Asset position The amount of assets maintained in a particular asset class, e.g., a 60% position in equities.
Automatic enrollment Also referred to as negative election enrollment. A plan design option that allows for a certain percentage or dollar amount of each eligible employee’s compensation to be automatically contributed to the plan unless the employee designates a different amount or affirmatively elects not to contribute. See also: Negative elections
Average Benefits Test A test used to ensure that a plan meets the minimum coverage requirement. It is performed if the plan does not pass the Ratio Percentage Test. There are two parts to this test, the first part is the “nondiscriminatory classification test” and the second part is the “average benefit percentage test.” Both parts must be satisfied in order to pass the average benefits test. See also: Ratio Percentage Test, Minimum Coverage Requirements

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Term Description
Balance forward valuation: A defined contribution plan accounting method in which all activity is accounted for at the plan level and allocated to the individual participant level accounts at the end of the valuation period for reporting purposes. The accounts are valued periodically (e.g., monthly, quarterly, semi-annually, or annually). See also: Daily valuation
Benefit Paying Agent: The entity responsible for disbursing the plan assets to pay benefits to plan participants, withholding and remitting taxes, and issuing tax reporting to the payee and the applicable government entities.
Benefit payments: The payments made out of a retirement plan to a participant. Benefit payments may also be paid to a beneficiary if the participant is deceased.
Benefit statements: Statements showing a participant’s total accrued benefit and the vested portion of the benefit. Benefit statements for defined contribution plans often include beginning and ending balances for each investment, deferrals and employer contributions during the reporting period and changes in investment fund values. Providers are using the account statement as an important part of the overall communications and education process.
Black-out period: Any time period of more than three business days during which rights granted under the plan to trade or take distributions or loans is limited or suspended under individual account plans, excluding suspensions required by securities laws and QDROs.
Bond: An obligation made by a corporation or government entity to the buyer of the bond to repay a stated amount of money on a stated date (the maturity date) at a specific rate of interest.
Break in service: A break in service occurs when an employee fails to complete at least 501 hours of service in a measurement period, referred to as a computation period, which is defined in the plan. See also: One-Year Break in Service Rule, Rule of Parity, Two-Year 100% Vested Rule
Broker: An agent who executes directives to purchase or sell securities in the marketplace.
Bundled services: An integrated set of services, including administration, recordkeeping, asset management, and participant communications. A bundled service arrangement provides the employer with one primary contact point for all aspects of plan servicing.

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Term Description
Cafeteria Plan A written plan under which participants may choose between cash and certain qualified benefits not includable in income because of a specific IRC exclusion. Qualified benefits include health, group-term life, dependent care and other benefit programs that the company sponsors. The employee can customize a benefit package that is right for his or her particular situation. The cost of the program to the employee is reduced because the benefits are purchased on a pre-tax basis.
Career average earnings A compensation definition that may be used for determining the benefits under a defined benefit plan. Compensation for each year of service is added together and divided by the number of years of service to arrive at an average compensation amount. The average compensation amount is then used to determine the retirement benefit of the participant. See also: Compensation
Cash Balance Plan A defined benefit plan that provides some features of a defined contribution plan. These plans report benefits by reference to a participant’s hypothetical account balance and typically allow for a lump sum benefit distribution at termination of employment. See also: Defined benefit plan, Defined contribution plan
Cash or deferred arrangement (CODA) Any arrangement which is part of a profit sharing or stock bonus plan under which an employee may elect to have the employer make payments to the employee directly as cash or as contributions to a trust under the plan on behalf of the employee. A 401(k) plan is a CODA. See also: Elective deferral contribution
Catch-up contributions See: Deferral catch-up contributions
Catch-up matching contributions An optional plan feature that allows an employer to match an employee’s deferral catch-up contribution. The employer matching contribution is subject to nondiscrimination tests.
Class exemptions See: Prohibited transaction
COBRA See: Consolidated Omnibus Budget Reconciliation Act
CODA See: Cash or deferred arrangement
Collectively bargained plans Plans that cover union employees and that provide retirement benefits negotiated under a collectively bargained agreement.
Common stock Represents a share of ownership in a corporation. Common stock increases and decreases in value based on the attractiveness of ownership as perceived in the marketplace. Many issuing corporations also pay dividends, which represent a share of accumulated profits.
Company stock Often an investment option in retirement plans, it allows employees to invest retirement dollars in the common stock of the company that they work for.
Compensation The amount paid to an employee for work performed. This may include salary, overtime, bonus, commission, and vacation pay. Compensation is defined in the plan document and used for purposes of determining benefits under the plan.
Compliance The act of conforming to legislative rules and regulations to maintain a plan’s qualified status.
Computation period The 12-month period(s) that is/are defined in the plan and used to determine whether a participant has a year of service for eligibility and vesting. The computation period may be defined differently for each purpose. For eligibility purposes, the initial computation period must be the first employment year.
Conduit IRA An Individual Retirement Account that is established for the sole purpose of receiving a distribution from a qualified plan so that the assets can subsequently be rolled over into another qualified plan. Conduit IRAs generally are not necessary beginning in 2002 because of the portability changes made by EGTRRA.
Consolidated Omnibus Budget Reconciliation Act The Consolidated Omnibus Budget Reconciliation Act of 1985 established the employee’s right to continued group health insurance coverage upon job termination.
Constructive receipt Constructive receipt occurs when deferred compensation is available to the employee so that he or she may draw upon it at any time. There is no constructive receipt if the employee’s right to the deferred compensation is subject to substantial restrictions or limitations. See also: Nonqualified plan
Contract holder The employer or trustee to whom an insurance contract is issued.
Contribution Cash, securities or other deposits to a plan by participants and/or the employer to fund retirement benefits for the participants under the plan.
Controlled group For qualified plan purposes, the existence of a controlled group will cause employers to be treated as a single employer for participation, coverage, nondiscrimination testing, top heavy requirements, vesting, and limitations under IRC Section 415. Controlled group may be parent-subsidiary, or brother-sister groups.
Convertible bond A bond with a conversion feature that permits an investor to convert it into a specified number of shares of common stock.
Convertible stock A form of stock ownership with a conversion feature that permits an investor to convert it into a specified number of shares of common stock.
Corporation A legal entity that has certain rights and liabilities, separate from the owners of the corporation. See also: Limited Liability Corporation, Partnership, Non-profit organization, Self-employed, Subchapter-S Corporation
Coverage test See: Minimum Coverage Requirements
Coverdell Education Savings Account Accounts that allow individuals to make nondeductible contributions on behalf of a designated beneficiary. Contributions are limited annually. These accounts provide for tax-free withdrawals for qualified education expenses. These accounts were formerly called Education Individual Retirement Accounts.
Cross-tested formulas Sometimes called “new comparability formulas.” A formula for allocating employer contributions in certain defined contribution plans that results in higher contributions to older, more highly compensated employees. In order to ensure nondiscrimination, the plan is tested on the basis of benefits rather than contributions.
Custodian An entity (usually a bank or trust company or other financial institution) responsible for safekeeping of the assets of the plan. If the Plan Trustee is an individual or group of individuals, the Trustee usually engages a Custodian for the plan. Alternatively, a financial institution trustee can perform custody duties, in which case there may not be a plan Custodian. See also: Trustee

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Term Description
Daily valuation A defined contribution plan account accounting method in which all activity is accounted for in individual participant accounts and then aggregated at the plan level for trading and reporting purposes. The accounts are valued each business day. See also: Balance forward valuation
Death benefits Benefits paid to the beneficiary of a deceased participant. See also: Distributable event
Declaration date The date on which the issuing corporation approves and publishes the rate and payment date for the next income payment (dividend) to be made to shareholders.
Deferral catch-up contributions An optional plan feature that generally allows older workers to contribute, on a pre-tax basis, an amount over the annual deferral limits. Catch-up rules and contribution limits can vary according to plan types. IRAs also allow catch-up contributions.
Deferral contribution See: Elective deferral contribution
Deferred compensation The deferral of a portion of an employee’s compensation until retirement or some future date.
Deferred vested benefit A vested benefit under a defined benefit plan that remains in a plan after the participant has separated from service. See also: Separation from service
Deficit Reduction Act (DEFRA) of 1984 An act that eliminated Social Security Integration in 401(k) plans, mandated nondiscrimination testing, and grandfathered certain money purchase plans with salary reduction features.
Defined benefit plan A retirement plan where the benefit is determined based on a formula specified in the plan. The benefit is usually stated as an average percentage of compensation over a defined period of time. Contributions to fund the benefits provided by the plan are made by the employer and are calculated by an actuary based on certain assumptions.
Defined contribution plan A retirement plan that specifies the annual contribution into the plan. Benefits are determined based upon contributions to an individual employee’s account and any earnings or expenses allocated to the account. The annual contribution can include amounts contributed by both the employer and employee.
DEFRA See: Deficit Reduction Act
Department of Labor (DOL) A U.S. government agency that administers certain provisions of ERISA and is responsible for protecting plan participant interests and interpreting and enforcing provisions of ERISA. See also: Employee Retirement Income Security Act, Pension Welfare and Benefits Administration
Determination date In a plan, usually the last day of the preceding plan year.
Determination period Beginning in 2002, a period that is defined as the plan year containing the determination date.
DFE See: Direct filing entity
Direct filing entity Some plans participate in certain trusts, accounts or other investment arrangements that may file the Form 5500 as a direct filing entity. Examples of these include master trust investment accounts, pooled separate accounts, collective trust funds, and group insurance arrangements. For a complete list of DFEs and specific details, refer to the Filing Instructions for Form 5500 available through the DOL. See also: Form 5500 Series
Direct rollover The rollover of a participant’s distribution directly from one employer-sponsored plan to another or to an IRA. No federal income tax is withheld or penalties assessed if the rollover complies with certain requirements (because the participant is never in receipt of the money).
Disability benefits Benefit payments made to a participant due to disability before retirement. See also: Distributable event
Discretionary contribution An optional employer contribution, such as a profit-sharing contribution.
Distributable event Specific events that trigger a distribution from a plan. See also: Separation from service, Severance from employment, Death benefits, Disability benefits, Retirement benefits
Distributions Payments made out of the plan.
Dividend A share of the issuing corporation’s accumulated profits paid to shareholders.
DOL See: Department of Labor
DOL Guidance on Contribution Submissions More stringent guidelines issued in 1996 regarding the timing of employee contribution deposits in the plan. Contributions must become part of the plan assets as soon as administratively feasible, but no later than 15 business days following the end of the month during which the contribution was withheld.
DOL Guidance on Employee Communications Interpretive guidelines issued in 1996 for employers and service providers wishing to provide educational opportunities for plan participants. These guidelines distinguish between investment education and investment advice.
DOL Guidance on Section 404(c) Compliance Regulations issued in 1992 for employers wishing to take advantage of Section 404(c) protection with respect to participant directed investments. See also: Section 404©

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Term Description
Earned Income Net profit from the business of a self-employed individual that has been reduced by one-half of the Social Security self-employment taxes paid to shareholders.
Economic Growth and Tax Relief Reconciliation Act The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increased deferral, compensation and contribution limits. It added catch-up provisions to IRAs, 401(k), 403(b) and 457plans, SARSEPs, and SIMPLEs. It increased portability between plan types. EGTRRA encouraged new plan formation through greater tax deductions for employers and simplified certain aspects of plan administration.
Economic Recovery Tax Act (ERTA) of 1981 Opened IRAs to any wage earner or wage earner’s spouse and amended the allocation limits and deductibility limits for ESOPs to eliminate violation due to necessary debt reduction contributions.
Education IRAs See: Coverdell Education Savings Account
EGTRRA See: Economic Growth and Tax Relief Reconciliation Act
Elapsed Time Method A method used for measuring and crediting years of service based on a defined period of time that has passed from an employee’s date of hire. Under this method, a participant is credited with one year of service when he or she works a 12-month period, regardless of the actual number of hours the employee completes during the period.
Elective deferral contribution The amount the participant elects to have contributed on his or her behalf to a cash or deferred arrangement (CODA). The contribution and earnings thereon are tax deferred, and not included in gross income until distribution. The elective deferral is the participant’s pre-tax contribution.
Elective Deferral Limit (IRC Section 402(g)) A statutory limit on the amount of elective deferral contributions that can be made by a participant in any one calendar year. This amount is adjusted annually for inflation. See also: Pre-tax deferral
Eligibility The process whereby an employee meets the requirements for participation in the plan, as stated in the plan document. See also: Last Day Rule
Employee Retirement Income Security Act The Employee Retirement Income Security Act (ERISA) was enacted in 1974 for the purpose of governing employee benefit plans. ERISA sets forth reporting and disclosure standards, fiduciary requirements, minimum rights for employees including coverage, vesting and nondiscrimination of benefits, and sets minimum funding standards. ERISA also created Individual Retirement Accounts (IRAs) and established the Pension Benefit Guaranty Corporation (PBGC). The administration of ERISA is divided among the Department of Labor (DOL), the Internal Revenue Service (IRS) of the Department of the Treasury, and the Pension Benefit Guaranty Corporation (PBGC). Title I, which contains the rules for reporting and disclosure, vesting, participation, funding, fiduciary conduct, prohibited transaction rules, and civil enforcement, is administered by the DOL (and, in certain instances, the IRS). Title II, which amended the Internal Revenue Code to amend the tax qualification rules and parallel many of the Title I rules, is administered by the IRS. Title III is concerned with jurisdictional matters and with coordination of enforcement and regulatory activities by the DOL and IRS. Title IV covers the insurance of defined benefit pension plans and is administered by the PBGC. See also: Department of Labor, Pension Benefit Guaranty Corporation, Internal Revenue Service, Internal Revenue Code
Employee Stock Ownership Plan (ESOP) A profit sharing, stock bonus or money purchase plan that invests primarily in securities issued by the employer maintaining the plan or its affiliate. See also: Nonleveraged ESOP
Employer-sponsored plans Retirement plans that are supported and partially paid for by the employer.
Equivalency method A method of measuring and crediting years of service based on a formula that takes into account the expected hours of service performed. For example, one week of work may be deemed to equal 45 hours.
ERISA See: Employee Retirement Income Security Act
ERTA See: Economic Recovery Tax Act
ESOP See: Employee Stock Ownership Plan
Excess Aggregate Contribution Employee and matching contributions that exceed the maximum amount allowed under the ACP test.
Excess contribution The elective deferral contribution made by highly compensated employees (HCEs) that exceeds the maximum amount allowed under the ADP test. See also: Excess deferral
Excess deferral The elective deferral contribution that exceeds the elective deferral limit.
Ex-date The date on which shares will trade in the marketplace without the dividend being paid to the purchaser. On this date, the value of the shares typically declines to reflect the loss of the income to the buyer.

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Term Description
401(a) See: Internal Revenue Code
401(a)(17) See: Internal Revenue Code
401(a)(4) See: Internal Revenue Code
401(k) Plan A defined contribution plan that meets the requirements of Section 401(k) of the Internal Revenue Code. Under Section 401(k), participants may elect to defer a portion of their salaries on a pre-tax basis. Federal income tax on contributions and earnings thereon is deferred until a distribution is made from the plan. A 401(k) plan may also include a discretionary employer contribution, after-tax employee contributions, and matching employer contributions. See also: Internal Revenue Code
402(g) See also: Internal Revenue Code
403(b) Plan A retirement plan, similar to a 401(k) plan, available to tax-exempt charitable organizations, such as hospitals, and educational institutions, and public schools and universities. The Small Business Job Protection Act provides that tax-exempt organizations, except governmental agencies, may now offer 401(k) plans. See also: Internal Revenue Code
410(b) See: Internal Revenue Code
412 See: Internal Revenue Code
415 Limits See: Section 415 Limit
457 Plan A plan maintained by government agencies and non-governmental tax-exempt organizations. Contributions in government plans are held in trust and are not subject to the agency’s creditors. Employee deferrals are subject to an annual limit. In government plans, taxation of deferred amounts and income earned is deferred until amounts are distributed. See also: Internal Revenue Code
501(c)(3) Defines tax-exempt charitable organizations. Such organizations may offer 403(b) and/or 457 plans. See also: Tax-exempt organization
Facts and Circumstances Hardship Withdrawal A method for allowing hardship withdrawals that allows more flexibility than the safe harbor withdrawal method. Using this method, the plan participant must prove to the Plan Administrator the need for the withdrawal and that the withdrawal is necessary to satisfy the need. There is no mandatory suspension from contributing to the plan following this type of withdrawal. See also: Safe Harbor Hardship Withdrawals
FDIC See: Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is a government agency that guarantees individual savings accounts in a bank against loss up to $100,000 per Social Security number per bank. Banks pay a premium to the FDIC. Covered products include savings accounts, certain checking accounts and certificates of deposit.
Fiduciary An individual or corporate entity that has legal responsibility for something that belongs to someone else. Under ERISA, the definition of a fiduciary is a functional one, generally based upon whether the person has any discretion or control over the management, administration, or assets of the plan or renders investment advice for a fee. The definition typically includes plan sponsors, trustees, the plan administrator and discretionary investment managers or advisors. Under ERISA, plans must be maintained and operated exclusively for the benefit of plan participants, and fiduciaries are subject to the prudent man rule in exercising discretionary control over a plan and its assets.
Final average earnings A compensation definition that may be used in a defined benefit plan. Typically, compensation for each of the last 3-5 years of service are added together and divided by the number of years used in the calculation. The average is used as the compensation in calculating the retirement benefit.
Forced payout rule See: Mandatory distribution rule
Forfeiture The portion of a terminated participant’s account in which the participant has no vested interest. The nonvested portion of the account may be allocated to remaining participants, used to reduce the employer’s contribution or pay plan expenses.
Form 1099R A tax form required by the IRS to be sent at year end to report distributions made to participants and beneficiaries in retirement or profit sharing plans, IRAs, SEPs, annuities, or insurance contracts.
Form 5500 Series The annual report of the activities of any ERISA-covered plans and certain other qualified plans, that occurred during the plan year. Unless an extension is granted, it is due to the DOL by the last day of the seventh month following the close of the plan year. The particular 5500 Form and schedules required to be filed depends on the plan size and features.
Full enrollment A method of plan enrollment that is used when organizations wish to have participants actively enroll in new plans or re-enroll in existing plans.
Fully insured status Eligibility for Social Security benefits after attaining the prescribed retirement age, and accumulation of a minimum number of earnings credits.
Fund based option An investment option in a plan that is usually made up of various securities. Typical examples include mutual funds or pooled funds.

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Term Description
General nondiscrimination test: The annual compliance test that measures whether employer contributions or employer-provided benefits are nondiscriminatory in amount. Plans with a safe harbor plan design are not required to pass the general test. See also: Nondiscrimination testing
GIC: See: Guaranteed Investment Contract
Guaranteed Investment Contract (GIC): An investment option offered by insurance companies. This issuer promises to pay a fixed rate of interest and to return principal after a specified term.

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Term Description
Hardship Withdrawal: An optional feature that allows for withdrawal of elective deferral contributions in the event of an immediate and heavy financial need, and only in the amount necessary to meet the financial need. Hardship withdrawals generally are subject to ordinary income tax and a 10% penalty tax for early withdrawals.
HCE: See: Highly Compensated Employee
Highly Compensated Employee (HCE): An employee is considered to be a highly compensated employee if he or she performs services for the employer during the current or preceding year and falls into one of the following categories: (1) the employee was a 5% owner at anytime during the current or preceding year; or (2) for the preceding year, the employee had compensation in excess of the compensation threshold.
HR-10 Plan: See: Keogh Plan

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Term Description
IB See: Interpretive Bulletin
Income Tax Amendment of 1913 Constitutional Amendment creating federal income tax. Institution of income tax created the opportunity for “tax-advantaged” programs, thus paving the way for tax-favored retirement plans.
Incremental enrollment A method of plan enrollment that is used for existing plans where current participants simply have to make some new elections and have the opportunity to change their current deferrals or other contributions. Also, used for newly eligible participants to enroll.
Individual Brokerage Accounts Accounts that allow participants to purchase individual securities and mutual funds that are not part of the core offering of the plan using an outside registered investment representative. Contributions must be made first to the plan and then transferred to the brokerage account option.
Individually designed plan A type of plan document that is prepared by an attorney to meet the needs of an individual plan sponsor. Individually designed plans generally are submitted to the IRS for a favorable determination letter. Individually designed plans offer more flexibility than prototype or volume submitter plans in terms of design, but are more costly to install and maintain. See also: Plan document
Individual Retirement Account (IRA) A traditional IRA is a trust or custodial account established for the exclusive benefit of an individual and his or her beneficiary. Contributions are subject to limitations. Individual retirement accounts may also be the recipient of a rollover from a qualified plan or another traditional IRA. See also Roth IRA.
Individuals Individual stakeholders are the plan participants, retirees, beneficiaries and others benefiting from the plan. Plan participants benefit in a variety of ways ranging from plans that are completely employer funded to plans that accommodate tax-deferred savings, and tax-deferred earnings. They may also see a benefit through plans in which payroll deductions provide a convenient way to save for retirement.
Individual securities portfolio An investment option where an investment manager, or management company, is hired to put together a portfolio of securities specifically for a plan. Usually used for larger plans, especially defined benefit plans and non-participant directed defined contribution plans.
Individual service fees Fees paid to cover those costs associated with optional plan features that are charged to the participant using the feature. See also: Investment fees, Plan administration fees
In-kind payments The payment of actual shares of stock to a participant. Plans that offer employer stock generally must offer the option of receiving in shares, any distribution that is invested in the stock. If the stock is not readily tradable, the employee must have the option of putting the stock back to the employer at the latest valuation price.
In-service withdrawals An optional plan feature that allows for withdrawal of certain contributions before events normally required for distributions. Elective deferral contributions generally are not available for in-service withdrawals unless the participant has reached age 59 1/2 or is eligible for a hardship withdrawal. In-service withdrawals generally are subject to ordinary income tax, a 10% penalty tax for premature withdrawals and mandatory withholding. See also: Elective deferral contribution
Internal Revenue Code (IRC) Referred to as the “Code.” The Code is the statute that contains the federal tax laws, including the income tax. With respect to retirement plans, some of the essential Code sections mentioned in this program are: 401(a) – Contains the requirements for a retirement plan to be considered qualified for favorable tax treatment. 401(a)(4) – Provides the general nondiscrimination rule that qualified plans may not discriminate in favor of highly compensated employees concerning contributions or benefits. 401(a)(17) – Limits compensation that may be taken into account for plan purposes. 401(k) – Allows employers to maintain cash or deferred arrangements (CODA) which permit the use of employee salary deferral features. 402(g) – Limits the amount of employee elective deferrals. 403(b) – Allows employees of tax-exempt charitable organizations and public schools and universities to have salary deferral arrangements for retirement. 410(b) – Provides minimum coverage requirements for qualified plans. 415 – Limits the annual amount of contributions and benefits to participants under qualified plans. 457 – Allows employees of state and local governments to have salary deferral arrangements for retirement. 501(c)(3) – Defines tax-exempt charitable organizations. Tax-exempt charitable organizations may offer 403(b), 401(k), and/or 457 plans. See also: Tax-exempt organization
Internal Revenue Service (IRS) A division of the U.S. Treasury charged with administering, interpreting and enforcing the Internal Revenue Code. The IRS also determines if a plan complies with federal tax regulations and meets the qualification requirements of the Internal Revenue Code. See also: Employee Retirement Income Security Act
Interpretive Bulletin (IB) A formal communication issued by the Department of Labor (DOL) providing guidance and clarification with respect to issues that are important to the pension community. See also: Department of Labor
Investment An asset required for the purpose of generating future income (e.g., an increase in value and/or to realize a stream of income).
Investment advice See: Advice
Investment Company Act of 1940 Law governing registration and regulation for mutual funds. It is administered by the SEC.
Investment fees One of the several types of fees charged by service providers to cover the cost associated with the management of plan investments. These fees are usually paid for with plan money, thus passing the costs on to participants. See also: Plan administration fees, Individual service fees
Investment manager A plan fiduciary who provides asset management services to the plan. Plans typically have multiple investment managers appointed by a plan’s named fiduciary for investment purposes. An investment manager manages plan assets in accordance with the guidelines provided by the plans, initiates trades on behalf of the plan and works closely with the trustee/custodian to properly account for asset activity. Investment managers may be a bank, insurance company or registered investment adviser. See also: Trustee
IRA See: Individual Retirement Account
IRA Plus See: Roth IRA
IRC See: Internal Revenue Code
IRS See: Internal Revenue Service
IRS Ruling of 1956 Guidance regarding contributions and nondiscrimination was issued on cash or deferred arrangements (CODA) as to how they could reach tax qualified status.
IRS Ruling of 1963 Confirmed that cash or deferred arrangements (CODAs) meeting the 1956 ruling guidelines were exempt from the IRS doctrine of constructive receipt.
IRS Ruling of 1981 A ruling in which the IRS sanctioned the use of salary reductions as a source of pre-tax plan contributions. This ruling set the stage for the development and explosive growth of 401(k) plans.
Issuing corporation The corporation that issues stock or bonds for sale in the market. The corporation may use either of these means to raise revenue. By selling bonds, they take on an obligation or indebtedness; by selling stocks, they sell ownership interests in the company.

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Term Description
Joint and survivor benefits: Generally, defined benefit and money purchase plans (and some defined contribution plans) must provide benefits in the form of a joint and survivor annuity that is payable at least annually to a participant for life with a survivor annuity payable to the participant’s spouse following the death of the participant. The annuity form of payment may be waived with consent of the participant and spouse.

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Term Description
Keogh Plan: A qualified plan, often called an HR-10 plan, that covers one or more self-employed individuals.
Key employee: Any employee who at any time during the plan year containing the determination date is (1) an officer who meets a compensation threshold, (2) a 5% owner of the employer, or (3) a 1% owner of the employer who meets a compensation threshold. Compensation for determination is Section 415 compensation including elective deferrals. And, while the control group and affiliated service group rules (IRC 414) are disregarded for determining officers, 5% and 1% owners, the compensation received from these employers is aggregated to determine who is a key employee.
KSOP: A 401(k) plan that has an Employee Stock Ownership Plan (ESOP) feature.

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Term Description
Last Day Rule: An eligibility rule that states that an employee must be employed on the last day of the period in order to be eligible for a contribution. See also: Eligibility
Leveraged ESOP: An ESOP that uses borrowed money to purchase employer securities and the loan is secured with employer securities. As debt is paid back with employer contributions, shares are released from a suspense account and then allocated to employees according to the plan formula.
Limited Liability Corporation (LLC): A relatively recent form of business structure, it possesses the characteristics of both a partnership and a corporation. Like a corporation, a limited liability corporation is regarded as an independent entity and its owners enjoy the sort of limited liability enjoyed by corporate shareholders. Limited liability corporations resemble partnerships mainly in their tax treatment. See also: Corporation, Non-profit organization, Partnership, Self-employed, Subchapter S Corporation
LLC: See: Limited Liability Corporation
Loan: See: Participant Loans
Lump sum payment: A method of payment in which all of the retirement funds are made in one payment at the time of retirement/distribution. See also: Recurring payment

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Term Description
Managed Accounts For a fee, 401(k) participants can have their accounts run by investment professionals who make all the decisions. Depending on the provider and employer, there are variations on the way these accounts can be managed. Once information is gathered about the participant who is interested in using a managed account, monies are invested and rebalanced automatically, targeting a specific retirement goal. As the participant ages, generally their risk exposure is reduced. Some managed options allow participants access to an advisor for even more customization and some options also automatically increase participant savings rates.
Mandatory distribution rule Plans are allowed to automatically distribute account balances to participants who have separated from service if the vested account balances do not exceed $5,000. Plans may provide that rollover contributions and earnings be disregarded in determining the account balance. Beginning March 28, 2005, a mandatory distribution between $1,000 and $5,000 must be automatically rolled over to an IRA unless the participant directs otherwise.
Mandatory Distributions A rule that states that employers are allowed to automatically distribute account balances to employees who have separated from service if the vested account balances do not exceed $5,000. Beginning March 28, 2005, mandatory distributions between $1,000 and $5,000 must be automatically rolled over to an IRA unless the participant directs otherwise.
Matching contribution An employer contribution to the plan which is allocated based on the employee’s contribution to the plan. Matching contributions may be discretionary or required and may be at the end of a plan year or on an ongoing basis. Usually, the employer matches employee contributions by contributing some dollar amount per dollar contributed by the employee.
Maturity date The date upon which the final interest payment and/or original amount borrowed becomes payable to the lender or holder of the investment.
Minimum Coverage Requirements A qualified plan must be available to a cross section of employees and may not discriminate in favor of highly compensated employees. Certain plans automatically satisfy the coverage requirements under IRC Section 410(b); others must pass either the ratio percentage test or the average benefits test. See also: Internal Revenue Code 410(b), Ratio Percentage Test, Average Benefits Test, Nondiscrimination Testing
Minimum Funding Standard Defined in IRC Section 412 and corresponding regulations. Plans subject to minimum funding requirements include money purchase, target benefit and defined benefit plans. Employers are required to make the minimum contribution as calculated by the formula and/or actuary regardless of profitability.
Minimum Required Distributions (MRD) Rules under Internal Revenue Code Section 401(a)(9) regarding when (and how) an individual’s retirement benefits must be distributed. In general, an MRD represents a portion of an account which is required to be paid annually to participants who have retired and attained age 70 1/2. IRA owners and 5% or more owners in qualified plans (and certain other employer-sponsored plans) must begin distributions after attainment of age 70 1/2, whether retired or not. In defined contribution plans, the minimum amount required to be distributed from an account is determined by life expectancy tables covering the employee and beneficiary. The participant incurs substantial penalties if these distributions are not made. See also: Internal Revenue Code Section 401(a)(9)
Money Purchase Plan A defined contribution plan that requires the employer to make a specific formula-driven contribution to the plan each year. The contributions and earnings thereon are allocated to participant accounts. The participant is only entitled to the benefit that can be purchased with the account balance; hence the name money purchase. Money purchase plan contributions are subject to minimum funding standards, are not discretionary and are required even in non-profitable years. See also: Minimum Funding Standard, Nondiscretionary contribution
Mortgage An IOU given to a lender where real estate is pledged as the collateral.
MRD See: Minimum Required Distribution
Multiemployer plan A plan established under a collective bargaining arrangement (CBA) negotiated by a union and two or more unrelated employers that receives contributions from multiple employers . This type of plan was authorized under the Taft-Hartley Act of 1947. See also: Taft-Hartley Act
Mutual fund A portfolio of securities that is professionally managed and registered under the Investment Company Act of 1940. Shares issued by mutual funds can usually be purchased and redeemed on each business day. Fund types available include all publicly traded asset classes and a wide spectrum of investment objectives and policies.

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Term Description
NLRB Ruling of 1948 The National Labor Relations Board Ruling legitimized employee benefits as a form of compensation and an appropriate negotiation tool in collective bargaining arrangements.
NAV See: Net Asset Value
Negative elections See: Automatic enrollment
Net Asset Value (NAV) With respect to mutual funds, the net asset value is the market value of a fund share. It is calculated daily by dividing the total assets of the fund by the number of shares outstanding.
New comparability formulas See: Cross-Tested Formulas
NLRB See: National Labor Relations Board Ruling
Nondiscretionary contribution Employer contributions to a plan under a set formula. See also: Money Purchase Plan
Nondiscrimination testing May refer to a single test required to be performed for qualification, such as the ADP test, or may be used in reference to any number of tests such as coverage, compensation, ACP, ADP, the general nondiscrimination test or the availability of benefits, rights and features.
Nonelective contributions Employer contributions other than matching contributions.
Nonleveraged ESOP An ESOP plan in which employer cash contributions are directly applied to the purchase of employer securities (or the employer contributes employer securities). The employer securities are then allocated to employees according to a formula written in the plan. See also: Employee Stock Ownership Plan
Nonportable Refers to benefits that cannot be rolled over to another retirement plan or IRA when an employee terminates employment with the company sponsoring the plan. See also: Portable
Non-profit organization Tax-exempt organization. See also: Corporation, Limited liability corporation, Partnership, Self-employed, Subchapter-S Corporation
Nonqualified plan A plan generally offered by employers who wish to provide supplemental benefits, above what is permitted under qualified plans, to senior executives (and possibly other employees). These plans, often referred to as a deferred compensation plans, allow employees to delay recognition of earnings and contributions until a future date when benefits are distributed or the employee is in constructive receipt. Generally, any monies set aside to pay benefits must be available to the employer’s creditors upon the employer’s insolvency. The employer is not allowed a deduction for contributions until the employee is taxed on the deferred amounts. See also: Qualified plan, Rabbi Trust
Nonsubsidized savings Individual savings, outside of a formal plan, that does not receive any tax advantages. See also: Subsidized savings
NYIC Ruling New York Insurance Commission ruling in 1955 that authorized insurance companies to allow equity investments for retirement plan clients.

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Term Description
OBRA See: Omnibus Budget Reconciliation Act
OCC See: Office of Comptroller of the Currency
Office of Comptroller of the Currency (OCC) The bank regulatory agency of the federal government.
Omnibus Budget Reconciliation Act of 1987 Tightened funding requirements for defined benefit plans, further restricted plan terminations and increased the PBGC premiums.
Omnibus Budget Reconciliation Act of 1993 Lowered compensation limits for highly paid employees to $150,000.
One-Year Break-in-Service Rule An optional rule that states that the employer will not count pre-break service until the employee has completed a year of service following a break in service. See also: Break in service
Outsourcing Using a service provider, or multiple providers, to perform the various responsibilities associated with plan maintenance, such as administration, investment management and communications.

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Term Description
Participant Generally used to describe an employee who has met the eligibility requirements of the plan, as specified in the plan document, and is enrolled in the plan.
Participant-directed plan A plan where participants are allowed to direct the investment of their account balance among the investment options offered in the plan.
Participant loans A lien against a retirement account that is available on an equivalent basis that does not discriminate in favor of highly compensated employees, officers or shareholders, that is issued in accordance with plan loan provisions, that bears a reasonable rate of interest and is adequately secured.
Partnership For purposes of qualified plans, a partnership is considered the employer of each partner. A partner may make contributions as an employee, but the employer contributions are made by partnerships. In the case of the partner, compensation is earned income from the business or businesses for which the plan is established. Partners cannot individually establish plans, but the partnership can establish a plan in which the partners participate. See also: Self-employed, Corporation, Limited liability corporation, Non-profit organization, Subchapter-S Corporation
Party in interest Certain persons related to a plan including fiduciaries, service providers, employers, employee organizations, owners of at least 50% of the sponsoring company, and individuals related to fiduciaries, service providers, employers and owners. Prohibited transition rules under ERISA and the Code prohibit certain transactions between plans and parties in interest. See also: Prohibited transaction
Pay date The date the transfer agent actually pays a dividend to the shareholder of record. Payment may not be received that date by all shareholders, depending on how the transfer was made (wire, mail). Further, the funds may not be available for reinvestment on the day received. See also: Transfer agent, Record date
PBGC See: Pension Benefit Guaranty Corporation
Pension Benefit Guaranty Corporation The PBGC is the government corporation functioning under the Department of Labor that is responsible for insuring certain pension benefits under defined benefit plans. The PBGC oversees plans subject to Title IV of ERISA, including most defined benefit plans. The PBGC maintains a benefit fund, supported by mandatory employer premiums, to provide benefits to participants in the event a plan terminates and cannot meet its benefit liabilities. See also: Employee Retirement Income Security Act
Pension plan A plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits over a period of years, usually for life, after retirement. See also: Defined benefit plan, Money Purchase Plan
Pension Welfare and Benefits Administration The PWBA is a division of the Department of Labor that oversees pension and welfare plans. See also: Department of Labor
Permitted Disparity Refers to the maximum difference in rates between what is contributed, as a percentage of pay, to employees with earnings above the taxable wage base and those with wages below the taxable wage base in plans that utilize Social Security integration in its benefit formula. The maximum permitted disparity level (the difference between the upper and lower percentages) is the lesser of 5.7% or the contribution percentage for compensation below the wage base. See also: Taxable wage base, Social Security integration
PIA See: Primary Insurance Amount
Plan accounting See: Recordkeeper
Plan administration fees One of several fees charged by service providers and paid by plan participants to cover the costs associated with the ongoing plan maintenance, such as recordkeeping and plan accounting. See also: Investment fees, Individual service fees
Plan Administrator The person or committee who is generally responsible for managing the plan and ensuring the compliance of the plan with all applicable rules and regulations. This includes contracting with external servicing providers, approving plan expenses, verifying or approving withdrawals of plan assets (including benefit payments), timely transmission of plan contributions, and signing and filing all government reports. See also: Plan officials
Plan document A written document that specifies the requirements, benefits and restrictions of the plan. All qualified plans must be in writing. See also: Individually designed plan, Prototype plan, Volume submitter plan
Plan entry date The date on which an eligible employee may enter the plan. Generally, plans must provide at least semi-annual entry dates.
Plan merger Refers to the coming together of two plans. Usually, mergers result from the purchase or sale of an ongoing business. The buyer has several options with respect to the seller’s plan, and merging it with an existing plan is one option. Specific requirements regarding the preservation of assets, accrued benefits and certain plan options must be observed. Mergers are addressed under IRC Section 414(l) and IRS regulations thereunder.
Plan officials Generally, the Plan Administrator and Plan Trustee named in the plan document that provide overall direction for the plan and are the primary fiduciaries of the plan. One person may fill both of these roles. See also: Plan Administrator, Trustee
Plan participant An employee enrolled in a retirement plan.
Plan spin-off Generally, when a portion of the plan ceases to be a part of the plan and may become its own plan, typically when subsidiaries of a corporation are divested.
Plan sponsor The entity (employer) that establishes and maintains the plan for its employees.
Plan stakeholders Four groups that have a vested interest in the success of retirement plans: plan sponsors, employees, service providers and the U.S. Government.
Plan termination The decision to end a plan and the subsequent process of closing the plan. See also: Pension Benefit Guaranty Corporation (PBGC)
Plan transfers Assets of a plan transferred to a new or existing plan.
Plan Trustee See: Trustee
Plan year A twelve-month period established by the plan that ideally is tied to the compensation policies, the contribution timing requirements and the cash flow needs of the employer. It may be the calendar year, a fiscal year, or some other year.
Pooled fund A professionally managed portfolio of securities offered for sale by an insurance company or a bank to its trust clients. Pooled funds offered by banks are regulated by the Office of the Comptroller of the Currency and pooled funds sold by insurance companies are regulated by state insurance departments. Pooled funds include a wide variety of asset classes and investment objectives. The portfolio is valued periodically and traded in units.
Portable Refers to an employee’s ability to rollover their retirement benefits to another plan or IRA when they cease employment with the sponsoring employer. See also: Nonportable
Preferred stock A form of stock ownership that increases and decreases in value like common stock but usually pays a higher dividend than the common stock of the issuing corporation. Preferred stockholders have priority rights over common stockholders and may have different voting rights than common stockholders.
Pre-tax deferral The money that an employee can deduct before taxes and put into a retirement fund. See also: Elective deferral contribution
Primary Insurance Amount (PIA) The basic Social Security benefit an individual is entitled to receive at full retirement age. It is based on an individual’s average indexed monthly earnings during the 35 years in which the individual earned the most.
Privately held stock Stocks that are not publicly traded on the stock exchanges. See also: Publicly traded investments
Privatized account A theoretical retirement account where individuals would direct the investment options for all or a portion of their Social Security accounts.
Profit sharing plan A defined contribution plan in which the company agrees to make substantial and recurring contributions to the plan. Contributions to a profit sharing plan are generally discretionary. See also: Discretionary contribution
Prohibited transaction One of a variety of transactions that involve a plan or plan assets and is prohibited under ERISA Section 406 and rules under Code Section 4975. Prohibited transactions include transactions between plans and a party in interest, including a sale, exchange or lease, a loan or other extension of credit or provision of services, and any transaction in which plan assets are transferred to a party in interest or a party in interest benefits by a use of plan assets directly or indirectly. Plan investments in employer stock and employer real estate, in excess of certain limits, are also prohibited. The prohibited transaction rules also prohibit fiduciaries from self-dealing, acting when there is a conflict of interest and receiving compensation from third parties in connection with plan transactions. Fiduciaries and parties in interest who engage in prohibited transactions may be liable to the plan for damages under ERISA and may be required to pay excise taxes under the Code. Statutory and class administrative exemptions are available for some activities and the DOL may issue individual exemptions.
Pro-rata basis A participant account accounting method used primarily in balance forward plans. This method takes plan asset accounts and divides the value of the plan accounts among participants as of the end of each accounting period on a pro-rata basis based on account balance. See also: Share accounting, Unit accounting
Prototype plan A type of plan document that provides limited plan features that are selected and “checked off” by the plan sponsor in an adoption agreement. Prototypes are sponsored by service providers and are submitted to the IRS for an Opinion Letter with regard to the provisions of the plan and its compliance in form with the Internal Revenue Code and regulations. The prototype plan is adopted by the plan sponsor who, depending on whether he or she has adopted a standardized or non-standardized adoption agreement, may then be required to request a favorable determination letter. See also: Adoption agreement, Plan document, Volume submitter plan
Publicly traded investments Securities that are traded on an exchange and are available for anyone to buy. See also: Privately held stock
PWBA See: Pension Welfare and Benefits Administration

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Term Description
QDRO: See: Qualified Domestic Relations Order
QNEC: See: Qualified Nonelective Employer Contribution
Qualified automatic contribution arrangement -QACA: An automatic enrollment plan provision that provides a safe harbor from ADP/ACP and top heavy testing. In a QACA, the employees are enrolled at a 3% deferral rate which increases according to a prescribed schedule and the employer must make minimum contributions to the plans which must vest 100% within 2 years. The QACA must provide required disclosure information to participants.
Qualified default investment alternatives (QDIAs): An investment option that is essentially a target retirement date fund, a balanced fund, or a professionally managed account, which is used to accept participant contributions in the absence of an affirmative election. A stable value investment may qualify as a QDIA for the first 120 days that it holds participant assets. A QDIA will provide fiduciary relief in the event of participant investment loss provided the plan complies with notice requirements and the sponsor has been prudent in selecting and monitoring the investment.
Qualified Domestic Relations Order (QDRO): A judgement or decree from a court that awards all or a part of a participant’s benefit to an alternate payee, typically the former spouse or dependent, pursuant to state domestic relations law regarding child support, alimony or marital property rights.
Qualified Joint and Survivor Annuity (QJSA): An annuity for the life of the participant with a survivor annuity for the life of the spouse. In a QJSA the survivor annuity may not be less than 50% and may not be more than 100% of the annuity payable during the participant’s lifetime.
Qualified Matching Contribution (QMAC): Employer contributions made on account of an elective deferral or after-tax contribution by the participant that may be used to satisfy the ADP test. To be a qualified matching contribution, the contribution must be 100% vested and subject to the 401(k) elective deferral distribution restrictions. See also: ADP test
Qualified Nonelective Employer Contribution: QNECs are employer contributions that may be used to pass the ACP and ADP tests. The contributions must be 100% vested and subject to the 401(k) elective deferral distribution restrictions to be qualified nonelective contributions. See also: ACP test, ADP test
Qualified Plan: A plan that qualifies for special tax treatment because it meets certain requirements of the Internal Revenue Code. Qualified plans generally fall into two categories, defined benefit plans and defined contribution plans. Qualified plans must be in writing; must be communicated to employees; the assets of the plan must be held in trust for the exclusive benefit of participants; and the plan must be designed to be a permanent and continuing arrangement. See also: Nonqualified plan

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Term Description
Rabbi Trust A grantor trust under a nonqualified plan where assets are set aside in the trust to help fund the payment of deferred amounts. Employees sometimes have limited ability to direct investments under the nonqualified plan. The assets of the trust must remain available to the employer’s creditors if it becomes insolvent. Earnings on the trust assets are taxable to the employer. See also: Nonqualified plan
Ratio Percentage Test An annual test used to ensure that a plan meets the Minimum Coverage Requirements.
REA See: Retirement Equity Act
Realized gains and losses Those gains or losses that actually result from purchasing and selling investments in the marketplace. See also: Unrealized gains and losses
Record date The date the transfer agent uses to determine, according to his records, which shareholders are entitled to the dividend and how much to pay each shareholder. See also: Transfer agent, Pay date
Recordkeeper Generally, the firm that maintains accounting records for each participant, allocates plan assets among participants, and processes participant transaction requests. Typically, the recordkeeper performs required compliance testing and helps satisfy government reporting requirements.
Recurring payment Retirement distributions under defined benefit and defined contribution plans that allow participants to take distributions over time. See also: Lump sum payment
Replacement plan A plan adopted to replace another plan. One example is a plan that is adopted to take the place of a previous plan that was not providing employees with an adequate opportunity for retirement savings.
Replacement ratio The percentage of compensation that is targeted as the benefit amount in a retirement plan.
Reportable transaction A transaction (purchase, sale, or exchange) or series of transactions within the plan year in a plan with 100 or more participants that must be reported on the Form 5500. A transaction is reportable if it is in excess of 5% of the current value of plan assets; any series of transactions with the same person involving property other than securities, which amount in aggregate to more than 5% of the current value of plan assets; any series of transactions involving securities of the same issue, if in the aggregate, they amount to more than 5% of the current value of plan assets; or any transaction with respect to securities with the same person where any prior or subsequent single transaction is in excess of 5% of the current value of plan assets. Participant-directed transactions are not required to be reported.
Required aggregation Under the top heavy required aggregation rules, each plan of the employer in which a key employee participates during the determination period, and any other plan that enables a plan in which a key employee participates to meet the general nondiscrimination or minimum coverage requirements, is considered as one plan for purposes of top heavy requirements. See also: Top heavy test
Retirement benefits Distributions made according to plan provisions when a plan participant retires. See also: Distributable event
Retirement Equity Act (REA) of 1984 Reduced minimum age for mandatory participation, revised survivor benefit requirements and allowed for the assignment of qualified benefits in divorce proceedings.
Retirement Protection Act of 1994 An attachment to the GATT trade agreement that contained changes to the defined benefit funding rules and lump sum payment rules.
Revenue Act of 1942 Instituted basic nondiscrimination restrictions and limitations on excess funding of plans.
Revenue Act of 1978 Added Section 401(k) to the Internal Revenue Code, enabling salary reduction plans.
Rollover contribution The tax deferred movement of a participant’s balance from one retirement plan to another plan or an IRA. A rollover may be made directly to another plan or IRA, or may be distributed to the employee for rollover within 60 days. If the assets are distributed to the participant, then withholding of taxes is generally required, but this does not prohibit the participant from subsequently rolling the distribution over as long as it is within the 60-day window.
Roth IRA (IRA Plus) An IRA to which individuals are permitted to make nondeductible contributions, subject to limits that are reduced by any other IRA contributions and subject to a phaseout for higher income taxpayers. Roth IRA distributions would not be includible in gross income or subject to early withdrawal penalties if held for 5 years and made after the individual reaches age 59 1/2, made to a beneficiary upon the individual’s death, due to the individual becoming disabled or for first time home buyer expenses.
Rule of Parity A break-in-service rule that states that if the employee has no vested account balance and the number of consecutive one year breaks equals or exceeds the greater of five or the number of years of service prior to the break, then prior years of service may be disregarded for vesting purposes. See also: Break in service

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Term Description
Safe Harbor Hardship Withdrawals With respect to hardship withdrawals, a safe harbor or pre-approved method is provided for determining the need for the withdrawal. A withdrawal due to medical expenses, post-secondary education expenses, purchase of a primary residence, or to prevent eviction or foreclosure on a primary residence falls under the safe harbor provisions and is deemed financially necessary. See also: Facts and circumstances hardship withdrawal
Salary Reduction Simplified Employee Pension The SARSEP is much like a SEP plan except that it allows for employee contributions under a salary deferral arrangement and was designed for small employers. New SARSEPs may not be written after 1996. See also: Simplified Employee Pension (SEP)
SAR See: Summary Annual Report
SARSEP See: Salary Reduction Simplified Employee Pension
SAS-70 See: Statement of Auditing Standards Number 70
SBJA See: Small Business Job Protection Act
SEC See: Securities and Exchange Commission
Section 404(c) Refers to an ERISA section and Department of Labor regulations thereunder that provide certain relief from the fiduciary responsibility rules where a participant exercises control over the assets in his or her account if certain requirements are met. Under ERISA and the regulations, the participant will not be considered a fiduciary by virtue of his exercising control and the plan fiduciaries will not be held accountable for losses resulting from the participant’s choices. Plans with participant-directed accounts typically are designed to comply with the 404(c) regulations.
Section 415 Limit The Internal Revenue Code section that limits the annual benefits and contributions under qualified plans. See also: Internal Revenue Code
Securities and Exchange Commission The SEC is an independent, quasi-judicial regulatory agency responsible for administering federal securities laws. The SEC regulates firms engaged in the purchase or sale of securities, investment advisors, and investment companies. The SEC ensures that investors have access to disclosure of all material information concerning publicly traded securities and that the securities markets operate fairly.
Self Directed Accounts See: Individual Brokerage Accounts
Self-employed Generally refers to the owners of a business entity taxed as either a sole proprietorship or partnership. See also: Sole Proprietor, Corporation, Limited Liability Corporation, Partnership, Non-profit organization, Subchapter S Corporation
SEP See: Simplified Employee Pension
Separate plan maintenance Refers to a plan sponsor’s ability to maintain different plans for different segments of his or her workforce. Plans generally must be combined for certain testing and reporting purposes.
Separation from service A distributable event that occurs when an employee leaves the employment of the sponsoring organization. The participant may choose to take the benefits and pay the tax consequences or, in many cases, may rollover these funds into another retirement plan or IRA to avoid taxation. See also: Distributable event, Severance from employment
Service provider A firm or individual that provides services to a retirement plan, such as recordkeeping, administrative, investment, actuarial, or legal services.
Service weighted contribution formula A formula for allocating employer contributions where points are generally awarded according to years of service. Longer tenured employees receive larger percentages of contributions. See also: Age Weighted Contribution Formula
Settlement agent An agent that acts on behalf of the custodian and broker to provide centralized holding for actual paper certificates and provides electronic book entry accounting services.
Severance from employment Similar to a separation from service, except that it also includes certain changes in a participant’s employer due to a merger or acquisition. See also: Distributable event, Separation from service
Share accounting A participant account accounting method under which investment company shares or other securities held by the plan are allocated among the participant accounts. Any participant activity that reduces or increases shares will result in market purchase or sale of the investment. The value of shares for each period is the actual market price as of the last trade executed on the last business day of the period. See also: Pro-rata basis, Unit accounting
SIMPLE 401(k) Plan A qualified plan for employers with less than 100 employees that allows pre-tax deferrals to be contributed and is exempt from nondiscrimination testing and top heavy requirements. The deferral limit is lower than the limit for a regular 401(k) plan and the employer must make a 3% match or a 2% nonelective contribution for all eligible employees. All contributions to the plan are 100% vested.
SIMPLE IRA A tax-advantaged plan for employers with less than 100 employees that allows pre-tax deferrals to be contributed. The plan is exempt from nondiscrimination testing and top heavy requirements. Reporting requirements are also simplified. The deferral limit is lower than the limit for a SARSEP plan and the employer must make a 3% match or a 2% nonelective contribution for all eligible employees. All contributions to the plan are 100% vested.
Simplified Employee Pension (SEP) A tax-advantaged retirement plan, generally available to all types of employers, where employers make tax-deductible contributions to an IRA for employees. SEPs involve limited recordkeeping and reporting requirements and employers are not required to make a contribution every year. The plan is subject to IRA rules.
Small Business Job Protection Act The SBJA of 1996 is the act that raised limits on IRAs for non-working spouses, introduced SIMPLE plans, eased nondiscrimination testing requirements, allowed tax-exempt organizations to offer 401(k) plans, modified minimum distribution requirements, and repealed the combined limit on DB/DC plans.
SMM See: Summary Description of Material Modifications
Social Security A government mandated savings program enacted to provide a foundation for all citizens to have retirement income above the poverty level. During an individual’s working years, mandatory deductions are withheld from wages and the employer makes matching contributions. These withholdings and contributions are deposited with the federal government for management, growth, and ultimate disbursement back to contributing individuals, spouses or beneficiaries after the covered worker’s retirement, disability or death.
Social Security Act of 1935 Instituted the Social Security system as the foundation for retirement income.
Social Security integration Both defined benefit and defined contribution plans are permitted to recognize the future payment of Social Security benefits in their formulas. This allows plans to provide for a greater allocation to compensation above the Social Security Taxable Wage Base than to compensation below the wage base, up to the Permitted Disparity level. Employers can contribute more, as a percent of pay, to employees with earnings above the integration level. The taxable wage base is adjusted annually. See also: Taxable Wage Base, Permitted Disparity
Sole proprietor A person who owns his or her own unincorporated business. Sole proprietors are treated as their own employers for qualified plan purposes. Earned income (defined as net earnings from self-employment) is used as compensation for plan purposes. Sole proprietors generally can establish most of the plan types available to a corporation, except a sole proprietor cannot establish an employee stock ownership plan. See also: Self-employed, Corporation, Limited Liability Corporation, Non-profit organization, Partnership, Subchapter S Corporation
SPD See: Summary Plan Description
Stakeholders See: Plan stakeholders
Statement of Auditing Standards Number 70 A comprehensive annual review of all policies, practices and controls of the assets and financial records provided by the financial service provider. An accounting firm issues an opinion as to the adequacy of these internal policies and procedures.
Statutory exemption See: Prohibited transaction
Subchapter S Corporation A form of corporation treated as a partnership for income tax purposes where income is passed through to the shareholders. In order for a corporation to be eligible to make this election, it must meet certain requirements as to kind and number of shareholders, classes of stock, and sources of income. Retirement plans established by Subchapter S corporations generally are subject to many of the same rules that apply to other corporations. See also: Corporation, Limited Liability Corporation, Non-profit organization, Partnership, Self-employed
Subsidized savings Savings that receives tax advantages such as tax deferral or tax deduction. See also: Nonsubsidized savings
Summary Annual Report (SAR) The summary annual report is a summary of the information contained in the annual report (Form 5500). It must be supplied to participants within nine months after the close of the plan year. See also: Form 5500 Series
Summary Description of Material Modifications A summary description of any material modification (SMM) to the plan or information required to be provided in the Summary Plan Description. The Summary of Material Modifications is required to be distributed not later than 210 days after the close of the plan year in which the modification was adopted.
Summary Plan Description (SPD) A booklet that summarizes plan provisions in an easy to read format. Among other things, an SPD includes information about eligibility, vesting, employee rights, and benefit claims and appeal provisions. Required contents of the Summary Plan Description are dictated by the Department of Labor regulations. The SPD is required to be furnished to participants and beneficiaries by ERISA.
Survivor Benefits See: Joint and survivor benefits

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Term Description
Taft-Hartley Act Labor Management Relations Act of 1947 that created the right for unions and two or more unrelated employers to establish independent multiemployer pension plans. See also: Multiemployer plan
Target Benefit Plan A defined contribution plan in which contributions are computed by using formulas similar to those in defined benefit plans. The targeted benefit determines the amount of contribution that the employer is required to make each year. The actual benefit is not guaranteed and the participant bears the investment risk.
Taxable wage base (TWB) A specific dollar amount established annually by the Social Security Administration. Social Security taxes are calculated on earnings up to and including the TWB. See also: Social Security integration, Permitted Disparity
Tax-advantaged plan A retirement plan that receives special tax treatment.
Tax and Equity Fiscal Responsibility Act TEFRA of 1982 is the act that permitted corporate deductions for dividends paid on leveraged ESOP shares if the dividends are used to reduce or service debt outstanding and placed restrictions on participant loans within defined contribution plans.
Tax deduction Allowing an individual or firm to reduce their current amount of taxable income by the amount of retirement plan contributions.
Tax deferral When an individual is allowed to delay the payment of taxes on income until a later date in time.
Tax-exempt organization An organization exempt from federal income tax under Section 501(c) of the Internal Revenue Code.
Taxpayer Relief Act (TRA) of 1997 Introduced two new forms of IRAs. Expanded withdrawal provisions for all IRAs. Repealed tax penalty on excess distributions. Eliminated some DOL reporting requirements. Limited amount of forced company stock investments in 401(k) plans for deferral amounts.
Tax Reform Act (TRA) of 1986 Limited deductible IRA contributions on the basis of compensation and employer pension coverage, made vesting and eligibility rules more liberal for employees, substantially changed tax treatment of plan distributions prior to age 59 1/2 and after age 70 1/2, substantially revised nondiscrimination rules, imposed a $7,000 limit on elective deferrals, and imposed a $200,000 compensation limit.
TEFRA See: Tax and Equity Fiscal Responsibility Act
Third party administrators (TPAs) A service provider who traditionally performs solely plan administrative duties such as recordkeeping and compliance testing.
Thrift Plan An industry term used to describe a plan in which benefits are generally based on the amount of employee after-tax contributions, corresponding employer contributions, allocated forfeitures and earnings on investments.
Top hat plan A nonqualified deferred compensation plan that must be unfunded and is designed to benefit a select group of highly compensated employees or senior executives.
Top-heavy plan A plan is considered top-heavy if the present value of accrued benefits for key employees is more than 60% of the present value of accrued benefits for all employees. A top-heavy plan must provide minimum contributions or benefits to non-key employees and subscribe to an accelerated vesting schedule. See also: Key employee
Top-heavy test A test performed to determine if a plan is top-heavy. See also: Required aggregation
Top-heavy vesting schedule The legally required vesting schedule that top-heavy plans must satisfy . A plan must either use a 3-year cliff or 6-year graded schedule.
TPA See: Third party administrator
TRA See: Taxpayer Relief Act
Transfer agent An agent employed by the issuing corporation to maintain the official records of ownership of securities.
Treasury stock Stock that has been issued by a corporation and is currently owned by that same corporation.
Trust An arrangement established under trust law to hold and administer assets of a plan.
Trustee One of the primary fiduciaries of the plan. The trustee ensures that plan assets are not used to benefit the sponsor or other parties in interest. A trustee generally must be appointed for a plan (e.g., by the plan sponsor or in accordance with plan terms) although there may be more than one. A trustee may be a directed trustee subject to the instructions of a designated party regarding investment of plan assets, or may be a discretionary trustee with sole authority over the investment of plan assets. See also: Plan officials, Party in interest
TWB See: Taxable wage base
Two-year, 100 % Vested Rule A break-in-service rule that states that for plans requiring two years of service, employers may disregard a year of service completed before a one-year break. See also: Break in service

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Term Description
Unbundled services Various service providers contracted to manage different aspects of the same plan.
Unfunded plan Generally, a reference to a nonqualified plan in which benefits are designated as payable to employees under the plan, but assets to secure the benefits are not contributed to a real trust by the employer. May include a Rabbi trust arrangement. The employer takes a deduction when the employee receives or is in constructive receipt of the benefits. See also: Nonqualified plan, Rabbi trust
Uniformed Services Employment & Re-Employment Rights Act The Uniform Services Employment and Re-Employment Act (USERRA) of 1994 Prohibited discrimination against employees who are members of uniformed services. It eased reemployment rules in retirement plans for military personnel, specifically allowing for make-up contributions.
Unit accounting A participant account accounting method under which participant accounts hold “units” of one or more “funds” offered under the plan. (A “fund” could consist of a mutual fund or other investment, with expenses, if any, deducted from the fund.) Participant activity results in trades of fund units, which may or may not involve actual market trades. See also: Pro-rata basis, Share accounting
Unrealized gains and losses A change in value from the cost of an investment to its current price as determined by the market in which it is traded. See also: Realized gains and losses
USERRA See: Uniformed Services Employment of Re-Employment Rights Act

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Term Description
Vesting: As determined under the plan, a participant’s nonforfeitable right to a percentage of his or her benefits accrued under the plan, based on the length of service with the employer and the plan’s vesting schedule. Employee deferral and after-tax contributions are always 100% vested.
Volume submitter plan: A type of plan document sponsored by service providers that provides pre-approved language regarding plan features that can be selected by an employer and included in its plan. Volume submitter plans do not use an adoption agreement and are generally more expensive than a prototype but not as expensive as an individually designed plan. Volume submitter plans are required to be submitted to the IRS for approval, although the form of the document has been pre-approved. See also: Plan document, Adoption agreement

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Term Description
Welfare and Pension Plan Disclosure Act The Welfare and Pension Plan Disclosure Act (WPPDA) of 1958 was an act that protected participants from fraudulence or misuse of plan assets, provided participants the right of access to information about the plan, and provided participants with the right to bring charges against the plan administrator.
Withdrawal When money is removed from a retirement plan.
WPPDA See: Welfare and Pension Plan Disclosure Act
WPPDA Act Amendments of 1962 Authorized the Department of Labor to enforce the provisions of the act and to bring legal action to protect participant interests in plans.

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Term Description
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Term Description
Year of service: A 12-month computation period, defined in the plan, during which an employee is credited with 1,000 hours of service. It is used in determining service for eligibility and vesting purposes. See also: Actual count

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Term Description
401(a): See: Internal Revenue Code
401(a)(17): See: Internal Revenue Code
401(a)(4): See: Internal Revenue Code
401(k) Plan: A defined contribution plan that meets the requirements of Section 401(k) of the Internal Revenue Code. Under Section 401(k), participants may elect to defer a portion of their salaries on a pre-tax basis. Federal income tax on contributions and earnings thereon is deferred until a distribution is made from the plan. A 401(k) plan may also include a discretionary employer contribution, Roth deferral contributions, other after-tax employee contributions, and matching employer contributions. See also: Internal Revenue Code
402(g): See also: Internal Revenue Code
403(b) Plan: A retirement plan, similar to a 401(k) plan, available to tax-exempt charitable organizations, such as hospitals, and educational institutions, and public schools and universities. The Small Business Job Protection Act provides that tax-exempt organizations, except governmental agencies, may now offer 401(k) plans. See also: Internal Revenue Code
410(b): See: Internal Revenue Code
412: See: Internal Revenue Code
415 Limits: See: Section 415 Limit
457 Plan: A plan maintained by government agencies and non-governmental tax-exempt organizations. Contributions in government plans are held in trust and are not subject to the agency’s creditors. Employee deferrals are subject to an annual limit. In government plans, taxation of deferred amounts and income earned is deferred until amounts are distributed. See also: Internal Revenue Code

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Term Description
501(c)(3): Defines tax-exempt charitable organizations. Such organizations may offer 403(b) and/or 457 plans. See also: Tax-exempt organization