| Last Updated: 1/9/2002 |
401(k) Plan
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Employer-sponsored defined contribution plan that allows employees to make pretax contributions (maximum amount $11,000 for 2002). These types of plans typically include an employer matching provision. |
403(b) Plan
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A 403(b) plan is a retirement plan offered by a 501(c)(3) organization or certain educational institutions, which allows employees to make contributions into an account under the plan. |
501(c) (3) Organization
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A 501(c)(3) organization is a not-for-profit organization existing and operating under the guidelines of Section 501(c)(3) of the Internal Revenue Code. |
Accrued Benefit
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Under a defined benefit plan, this is the benefit earned by the participant that is payable at normal retirement date (usually age 65). |
Actual Contribution Percentage (ACP)
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Nondiscrimination test (for defined contribution plans) performed on employer matching contributions and after-tax employee contributions. (See Actual Deferral Percentage ADP) |
Actual Deferral Percentage (ADP)
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Nondiscrimination test for 401(k) plans. Tests that elective deferrals (pre-tax contributions) for highly compensated employees do not exceed those for non-highly compensated employees by more than a set percentage. (See Actual Contribution Percentage ACP) |
Actuarial Equivalence
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The condition where two or more values (e.g., benefit payments starting at different ages) have the same present value at the same measurement date. |
Actuary
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A person with both mathematical and business training and experience who can prepare liability, expense, and contribution calculations for pension plans, and reserve and premium calculations for insurance coverages. |
Annual Required Contribution
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Employer contributions to a retirement program that are required by law to be made annually. (For example, both SIMPLE-IRA’s and Money Purchase Plans require that the employer contribute to participant accounts for a particular plan year). |
Annual Tax Deductions
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The annual amount a corporation, small business owner, or self-employed individual can deduct from gross earnings for funding a retirement program. |
Annuity
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Series of monthly or annual payments. Can be level or reflect cost of living adjustments. Can be made for the life of an individual or a couple, or for a specified period of time. |
Asset Allocation
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The mix of investments within a financial plan. Assets can be invested in a combination of investment options ranging from conservative to aggressive. In most cases, the most appropriate mix varies depending on age and willingness to accept risk in exchange for the chance to earn greater earnings. |
Beneficiary Elections
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The participant’s written designation, under a retirement program, of the person who will receive the participant’s benefit upon the participant’s death. |
Board Resolution
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A written document signed by a company’s board of directors taking some formal action. |
C Corporation
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An entity established to conduct business that is taxed separately from the business owner. The state in which the company is incorporated sets the guidelines for incorporation. |
Career Earnings
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Some defined benefit plans use Career Earnings to calculate the retirement benefit. Under this type of plan, each year’s compensation while a participant (subject to IRS limitations) is summed and multiplied by a percentage (e.g., 2.0%) as specified in the plan. |
Cash Balance Plan
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A defined benefit plan that looks like a defined contribution plan. Participant’s benefits are determined by the annual employer ”contribution” made to each individual’s account. Similar to a defined contribution plan, these account balances grow at a pre-determined interest rate. At retirement the participant’s benefit is the ”lump sum” value of the account payable as a lump sum or converted into an annuity. |
Compensation Limits [IRS Section 401(a)(17)]
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Maximum annual compensation that can be reflected in determining benefit under a qualified plan. ($200,000 for plan year 2002.)
Self-employed individuals must deduct 50% of self-employment taxes and any retirement plan contributions made in the fiscal year from their gross earnings to calculate their net earnings, which are then subject to the $200,000 limitation. |
Contributions
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Payments made to a retirement plan to fund the retirement benefit. Generally, contributions are made by the employee, the employer, or both. |
Controlled Group
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A controlled group of businesses exists under the Federal Tax Code if there is either:
- A parent subsidiary group of corporations connected through at least 80% stock ownership.
- A brother/sister group in which five or fewer people own 80% or more of the stock value or voting power of each corporation and those same five or fewer people own more than 50% of the stock value or voting power of each corporation.
See section 1563(a)(2) of the Internal Revenue Code. |
Covered Compensation
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The average of the Social Security Wage Bases (SSWB) (currently $84,900) for the 35-year period ending at Social Security Normal Retirement Age (SSNRA). As the SSWB increases each year due to inflation, so does the Covered Compensation limit. This limit therefore is different for each year of birth. |
Defined Benefit (DB) Plan
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A defined benefit plan is a type of employer-sponsored retirement plan that promises to pay participants a specified benefit (usually monthly) beginning at retirement and continuing over a period of time, usually for the rest of the participant’s life. In some plans, a lump sum benefit option is also available.
The plan may state this promise as an exact dollar amount, such as $100 per month, or, more commonly, it may calculate the benefit through a formula that takes into account such factors as salary and service. (For example, 1 percent of your average salary for the last 5 years of employment for every year of service with your employer). Defined benefit plans do not involve individual participant accounts, and they are usually funded exclusively through employer contributions. The assets of the plan are held in trust or invested in insurance contracts and are used to pay the benefits when they come due. |
Defined Contribution (DC) Plan
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A retirement program that is similar to a savings account where the participant and/or employer contribute money to an individual’s account. This account grows with investment returns until retirement when it is usually distributed as a lump sum. Unlike a defined benefit plan, the ultimate benefit is unknown until actual distribution and may be directly tied to the rises and falls in the stock market.
In most cases, the employee chooses (”self-directed”) how to invest the contributions among the different funds offered by the employer. In some cases, the employer chooses (”employer directed”) how to allocate the contributions. |
Dividend
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A distribution of earnings to shareholders. |
Domestic Relations Order (DRO)
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A court order relating to the allocation and distribution of a participant’s retirement benefit upon divorce. A benefit is not payable by the plan until the order is Qualified (see Qualified Domestic Relations Order - QDRO) |
Early Retirement Reduction
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A provision in a defined benefit plan that allows a participant to retire prior to reaching normal retirement age (usually age 65) but with a reduced benefit. |
Elective Contribution
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A contribution made to a 401(k) plan where the employee had the option of receiving cash or having the employer contribute to the tax-deferred plan. |
Employee Contributions
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The contributions paid by an employee to an employer-sponsored retirement plan. Depending on the type of plan, employees may contribute on either a pretax or after-tax basis. Pretax contributions are usually funded through payroll deduction to a 401(k), 403(b), or SIMPLE plan. Profit Sharing and Money Purchase plans may permit after-tax contributions (and a small number of defined benefit plans may require them). |
Employer Contributions
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The contributions paid by an employer to an employer sponsored retirement plan. Depending on the type of plan, employer contributions may be either mandatory or discretionary. |
Employer Matching Contributions
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An employer contribution that is calculated as a percentage of an employee’s contribution. (For example, the employer may match 50% of the first 6% of pay contributed by the employee). |
Enrolled Actuary
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An actuary who has met educational and experience requirements set by the Joint Board for the Enrollment of Actuaries (a unit of the Departments of Labor and the Treasury). |
Employee Stock Option Plan (ESOP)
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A stock bonus or money purchase pension plan where the funds are invested in the employer’s company stock. |
Exclusion Allowance
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The amount of contribution to a 403(b) plan that can be excluded from a participant’s income. Calculated on a participant-by-participant basis. |
Final average Earnings (FAE)
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Average earnings for a specified period of time (often the highest 3 consecutive years out of the last 10 years before retirement) used in calculating the retirement benefit under some defined benefit plans. |
Formula Integrated With Social Security
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Either a defined benefit or defined contribution plan can be designed to ”integrate” with Social Security. An integrated plan formula provides a higher benefit (or contribution) for earnings above a threshold set by the plan than for earnings below the threshold. The threshold is usually either the Social Security Wage Base or Social Security Covered Compensation. |
Gross Earnings
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Total earnings before reduction for self-employment tax. |
Hardship Withdrawal
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If provided for under a plan, a participant may make a hardship withdrawal from his or her account before retirement due to a serious financial emergency. |
Highly Compensated Employee (HCE)
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An employee who was either a 5% owner of the company during the preceding or current plan year, or earned more than the HCE Income Threshold during the preceding plan year. |
Highly Compensated Employee (HCE) Income Threshold
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Compensation threshold to determine which employees are ”highly compensated” for nondiscrimination testing. $85,000 for plan year 2001 and $90,000 for plan year 2002. |
Individual Retirement Account (IRA)
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An account at a bank, brokerage, or other financial institution into which an individual can make an annual contribution up to a specified limit ($3,000 in 2002) to save for his/her retirement. Contributions may be deductible from income if the individual’s employer does not sponsor a retirement program, or if the individual’s income is less than legal limits. |
In-service Withdrawals
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A feature of some retirement plans allowing participants to withdraw money from their accounts while they are still employed. In-service withdrawals may be subject to a 10% penalty tax if the participant withdraws the money before age 59 1/2. |
Keogh
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A qualified retirement program that covers self-employed individuals. |
Key Employee
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An employee who during the prior plan year was:- An officer of the company earning more than $130,000 (indexed in $5,000 increments).
- 5% owner of the company.
- 1% owner of the company earning more than $150,000.
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Limited Liability Corporation
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Combines the more favorable characteristics of a corporation and a partnership. The LLC permits pass through taxation like a partnership while operating in a corporate-style structure, with limited liability as provided by the laws of the state of incorporation. |
Limited Liability Partnership
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A partnership that is similar to a Limited Liability Corporation (LLC). This type of organization is used for professional associations, such as attorneys and accountants. |
Maximum annual benefit payable from a qualified plan [IRS Section 415(b)]
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Maximum annual benefit payable from a qualified defined benefit plan: $160,000 for plan year 2002. Payable at age 62. |
Maximum annual contribution to a defined contribution program [IRS Section 415(c)]
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Maximum annual contribution to a defined contribution plan (i.e., employee elective deferrals + employer contributions): $40,000 for plan year 2002. Also cannot exceed 100% of pay. |
Money Purchase Plan
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A type of defined contribution plan under which an employer agrees to make mandatory annual contributions. Generally, contributions are based on a specified percentage of each participant’s compensation. After-tax contributions by employees may be permitted. |
Nondiscrimination Testing
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Compliance tests designed to ensure that an employer’s retirement program meets minimum coverage and benefit standards for Non-Highly Compensated Employees. |
Non-Highly Compensated Employee (NHCE)
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An employee who is not a Highly Compensated Employee. (See HCE above.) |
Nonqualified Plan
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A nonqualified retirement program is usually only designed for senior management staff. These plans provide an additional benefit in excess of what the qualified plan will pay. (Also called a SERP or Top Hat Plan.) |
Normal Retirement Date (NRD)
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The day on which a participant attains Normal Retirement Age. |
Participant Loan
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A feature of some retirement plans allowing participants to borrow the lesser of 50% of the account balance and $50,000, or if greater, $10,000. Certain restrictions apply, including the period for repayment, the amount, the interest rate, and who is eligible for a loan. Owner-Employees and Shareholder-Employees are eligible for loans beginning in 2002. |
Partnership
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A legal relationship between two or more persons who join to conduct business with each contributing money, property, labor, and skill. Each person receives a share in the profits or losses of the business. |
Personal Employment Plan (PEP)
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A defined benefit plan with a benefit formula that defines the lump sum payable at retirement. |
Plan Document
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The written instrument setting forth the terms of a retirement plan. Each plan covered by ERISA (Employee Retirement Income Security Act of 1974) must have a written plan document. |
Profit Sharing Plan
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A type of defined contribution plan under which an employer can make mandatory contributions, discretionary contributions, or both. These contributions are subject to limits set by the Internal Revenue Code and may be -- but are not required to be -- tied to profits. |
Qualified Domestic Relations Order (QDRO)
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A Domestic Relations Order that meets the legal requirements of the Internal Revenue Code to apply to a qualified retirement plan. (see Domestic Relations Order above) |
Qualified Retirement Plan
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Any type of retirement plan afforded special tax treatment because it meets the requirements set forth in the Internal Revenue Code. |
Return
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The interest, dividends, and gains or losses included in principal. |
Roth IRA
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An IRA under which current contributions are not tax-deductible, but with tax-free benefits payable at retirement. |
S Corporation
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A corporation whose shareholders have elected to be taxed like a partnership, with profits and losses passing through directly to the shareholders, rather than to the corporation. Generally used by smaller employers, as the number of shareholders is restricted. |
Salary Deferral Agreement
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An agreement between an employee and employer allowing the employee to reduce his or her salary and have the employer deposit those reductions into a retirement plan. There are several types of plans that permit salary deferral arrangements, such as a 401(k), 403(b) or SIMPLE Plan. |
Savings Plan
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A defined contribution plan where employer contributions are (usually) based on mandatory employee contributions. Employee participation is voluntary. Also known as a Thrift Plan. |
Simplified Employee Pension Plan (SEP-IRA)
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A type of retirement plan with individual IRA accounts for each participant. The employer funds the retirement benefit by making contributions that are remitted directly to the IRA accounts. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to the lesser of 25% of an employee’s annual salary, or an annually adjusted maximum ($40,000 in 2002). All contributions are immediately 100% vested. |
Supplemental Executive Retirement Plan (SERP)
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A nonqualified retirement program designed to provide an additional benefit in excess of what the qualified plan will pay. (Also called a Top Hat Plan). |
Savings Incentive Match Plans for Employees (SIMPLE)
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A type of defined contribution plan for companies with less than 100 employees. It allows employees to defer up to $7,000 for plan year 2002 on a pre-tax basis. The employer is required to match dollar for dollar up to 3% of the employee’s compensation, or provide a nonelective 2% contribution for all eligible employees. |
Social Security Covered Compensation
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See Covered Compensation above. |
Social Security Normal Retirement Age (SSNRA)
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Starting in 2002, the maximum benefit under Section 415(b) is not reduced unless benefits commence prior to age 62.
For plan years prior to 2002, the maximum benefit under a defined benefit plan is reduced if the participant commences payment prior to SSNRA.
For those participants born:
| prior to 1938 | | SSNRA = 65 | | 1938 - 1954 | | SSNRA = 66* | | 1955 + | | SSNRA = 67* |
* The actual ages at which full Social Security benefits become payable may differ slightly from those shown. The ages above are an approximation used by the IRS for qualified plan purposes. |
Social Security Wage Base
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The amount of pay subject to Social Security Retirement and Disability taxation (currently taxed at a rate of 6.2%). $84,900 in 2002. |
Sole Proprietorship
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A business owned by one person, generally an unincorporated business entity. |
Summary Plan Description (SPD)
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A document summarizing the terms of a retirement plan in plain language. This summary must be distributed to all participants. All plans covered under ERISA must have a summary plan description. |
Thrift Plan
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A defined contribution plan where employer contributions are (usually) based on mandatory employee contributions. Employee participation is voluntary. Also known as a Savings Plan. |
Top Hat Plan
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A nonqualified retirement program designed, usually for senior management, to provide an additional benefit in excess of what the qualified plan will pay. Also called a SERP. |
Top Heavy Plan
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A qualified retirement plan under which the value of benefits for ”key employees” exceeds 60% of the total value of benefits for all plan participants. Certain benefits which were distributed during the 5-plan year period preceding the current plan year are taken into account for purposes of making this determination. |
Vested Benefit
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Accrued benefits of a participant that have become nonforfeitable under the vesting schedule adopted by either a defined contribution or defined benefit plan. |
Years of Service (YOS)
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Years of service (usually years worked) that are recognized by the retirement program. May differ for periods credited for vesting and benefit accrual. |
