GLOSSARY
Retirement Plans Glossary from A to Z.
Whether you’re a plan sponsor, financial adviser, CPA or even an employee, this glossary is designed to help with your wondering minds.
A
401(k) Plan
An employer-sponsored defined contribution plan that allows employees defer a portion of their salary from their paycheck and contribute to an account before or after taxation. Employers may also make contributions to a participant’s account, called a company match or profit sharing. Federal (and sometimes state) taxes on contributions and investment earnings are “deferred” (i.e., postponed) until the participant takes money out of the plan (typically at retirement).
403(b) Plan
A nonprofit employer-sponsored defined contribution plan similar to a 401(k) plan. Provides a tax shelter for 501(c)(3) tax exempt employers, including public schools.
Actual Deferral Percentage (ADP)
A non-discrimination test that compares the amount deferred by highly-compensated employees to the deferrals of non-highly compensated employees.
Asset Allocation
An employee’s division of money between different types of investment choices. An example of asset allocation would be 70 percent stocks and 30 percent bonds.
Alternate Payee
A person other than a plan participant (such as a spouse, former spouse, child, etc.) who, under a domestic relations order (see qualified domestic relations order), has a right to receive all or some of a participant’s pension benefits.
Annual Audit
Federal law requires that all plans with more than 100 participants be audited by an independent auditor. It is also common to refer to a DOL or IRS examination of a plan as a plan audit.
Annual Report
A document filed annually (Form 5500) with the IRS that reports pension plan information for a particular year, including such items as participation, financials, and administration.
Automatic Deferral Default Percentage
The percentage of pay that is taken pre-tax and put into a plan when an employee is enrolled via an automatic enrollment feature. The typical automatic deferral default percentage is 3 percent of pay. Participants can generally choose to defer an amount other than the default percentage.
Automatic Enrollment
The practice of enrolling certain eligible employees in a plan and automatically deducting contributions from their paycheck. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to be auto enrolled must actively opt out or choose a different amount.
B
Beneficiary
A person(s) or trust designated to receive the plan benefits of a participant in the event of the participant’s death.
Blackout Period
This refers to the time when plan participants cannot access their accounts. These periods can be caused by a number of events, including a change in plan record keepers, a change in plan trustees, a change to daily valuation from monthly valuation, or a company merger or acquisition.
C
Cash-Out
The distribution of funds from a plan to a participant prior to retirement, typically occurring when a participant has a balance under $5,000 and leaves a company without requesting to have their funds rolled over into an IRA or into a new employer’s plan. Cash-outs are subject to federal withholding tax, and are subject to the 10% early withdrawal federal income tax penalty if taken before age 59½.
Cliff Vesting
A vesting schedule that gives an employee 100 percent ownership of company contributions after a specified number of years of service. (See also vesting.)
Common Control
Businesses are under common control when one entity owns at least 80 percent of the stock, profit, or capital interest in the other organization, or when the same five or fewer people own a controlling interest in each entity.
Conversion
The process of changing from one service provider to another.
D
Deferral
A pre-tax or after-tax (Roth) contribution set aside from an employee’s paycheck.
Defined Benefit Plan
A retirement plan in which the sponsoring company provides a certain guaranteed benefit to participants based on a pre-determined formula.
Defined Contribution Plan
An employer-sponsored plan in which contributions are made to individual participant accounts, and the final benefit consists solely of funds (including investment returns) that have accumulated in these individual accounts. Depending on the type of defined contribution plan, contributions may be made either by the company, the participant, or both.
Department of Labor (DOL)
The U.S. Department of Labor (DOL) deals with issues related to the American workforce – including topics concerning pension and benefit plans. Through its branch agency the Pension and Welfare Benefits Administration, the DOL is responsible for administering the provisions of Title I of ERISA, which regulates proper administration of plans.
Disclosure
Plan sponsors must provide access to certain types of information for participants, including summary plan descriptions, summary of material modifications, and summary annual reports.
Determination Letter
Document issued by the IRS formally recognizing that the plan meets the qualifications for tax-advantaged treatment.
Discrimination Testing
Tax qualified retirement plans must be administered in compliance with several regulations requiring numerical measurements. Typically, the process of determining whether the plan is in compliance is collectively called discrimination (or non-discrimination) testing.
Distribution
Any payout made from a retirement plan. See also lump sum distribution and annuity.
E
Early Withdrawal Penalty
There is a 10 percent early withdrawal federal income tax penalty for withdrawal of assets from a qualified retirement plan prior to age 59½. This 10 percent early withdrawal federal income tax penalty is in addition to regular federal and state tax (if applicable).
Eligibility
Conditions that must be met in order to participate in a plan, such as age or length of service requirements.
Eligible Employees
Employees who meet the requirements for participation in an employer-sponsored plan.
Employee stock ownership plan (ESOP)
A qualified, defined-contribution plan in which plan assets are invested primarily or exclusively in the securities of the sponsoring employer.
ERISA
Plan sponsors are required by law to design and administer their plans in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). Among its statutes, ERISA calls for proper plan reporting and disclosure to participants.
ERISA Rights Statement
ERISA requires that this document, explaining participant and beneficiary rights, be included within a summary plan description (SPD).
Excess Aggregate Contributions
After-tax participant contributions or matching employer contributions that cause a plan to fail the 401(m) actual contribution percentage (ACP) non-discrimination test.
Excess Contributions
Pre-tax participant contributions that cause a plan to fail the 401(k) actual deferral percentage (ADP) non-discrimination test.
Excludable Employees
The employees that may be excluded from the group being tested during 401(k) or 403(b) nondiscrimination testing. The following are excludable employees: certain ex-employees; non-resident aliens with no US source of income; employees who do not meet minimum age and length of service requirements; and, employees whose retirement benefits are covered by collective bargaining agreements.
Exclusive Benefit Rule
A rule under ERISA that says the assets in an employee account may be used for the exclusive benefit of the employee and his/her beneficiaries.
F
Facts and Circumstances Test
The test determining whether financial need exists for a 401(k) and 403(b) non-safe harbor hardship withdrawal.
Fidelity Bond
Protects participants in the event a fiduciary or other responsible person steals or mishandles plan assets. Qualified retirement plans must cover 10% of the plan assets at all times, or more if the plan has non-qualified assets
Fiduciary
A person with the authority to make decisions regarding a plan’s assets or important administrative matters. Fiduciaries are required under ERISA to make decisions based solely on the best interests of plan participants.
Fiduciary Insurance
Insurance that protects plan fiduciaries in the event that they are found liable for a breach of fiduciary responsibility.
Forfeiture
Plan assets surrendered by participants upon termination of employment before being fully vested in the plan. Forfeitures can be used to offset employer contribution, pay plan expenses, or allocated to plan participants depending on the plan document language.
Form 1099-R
A form sent to the recipient of a plan distribution and filed with the IRS listing the amount of the distribution.
Form 5500
A form which all qualified retirement plans (excluding SEPs and SIMPLE IRAs) must file annually with the IRS.
G
Graduated or Graded Vesting
A vesting schedule in which the employee earns the right to employer contributions gradually over a period of years, for example 20 percent ownership each year for six years (See also vesting.)
Guaranteed Investment Contracts (GICs)
Accounts that are invested in interest-bearing contracts purchase directly from banks, insurance companies, or mutual funds, which guarantee to maintain the value of the principle and all accumulated interest. Also called stable value funds, these accounts do not go down in value.
I
Individual Retirement Account (IRA)
Personal retirement vehicles in which a person can make annual tax deductible contributions. These accounts must meet IRS Code 408 requirements, but are created and funded at the discretion of the employee. They are not employer sponsored plans.
Internal Revenue Service (IRS)
This branch of the U.S. Treasury Department is responsible for administering the requirements of qualified pension plans and other retirement vehicles.
K
Keogh Plan
A qualified defined contribution plan permitting self-employed individuals to contribute a portion of their earnings pre-tax to an individual account.
L
Leased Employee
An individual employed by a leasing organization that provides contract services for the company for the period of more than one year.
Lump-Sum Distribution
The distribution at retirement of a participant’s entire account balance within one calendar year due to retirement, death or disability.
M
Matching Contribution
A contribution made by the company to the account of the participant in ratio to contributions made by the participant.
Money-Purchase Plan
A type of defined contribution plan in which the employer’s contributions are determined by a specific formula, usually as a percentage of pay. Contributions are not dependent on company profits.
Multi-Employer Plan
A pension plan to which more than one employer contributes, and which is maintained according to collective bargaining agreements.
Mutual Fund
An account with a broad range of investment options, each of which are diversified, reducing the risk to the participant.
N
Named Fiduciary
The plan document must name one or more fiduciaries, giving them the authority to control and manage the operation of the plan. The named fiduciary must also be identified as a fiduciary by a procedure specified in the plan document.
Nondiscrimination Rules
IRS rules that prohibit the plan or plan sponsor from giving disproportionately larger benefits to highly compensated employees (HCEs). Specific nondiscimination testing must be performed to determine whether or not a plan is discriminating against rank-and-file employees and if a plan top heavy.
Non-Highly Compensated Employees (NHCEs)
Employees who are not highly compensated. Generally, they are employees who earned less than $130,000 in 2020 (indexed for inflation). See highly compensated employees.
P
Participant
Person who has an account in the plan and any beneficiaries who may be eligible to receive an account balance.
Participant Directed Account
A plan that allows participants to select their own investment options.
Party-In-Interest
Those who are a party-in-interest to a plan include: the employer; the directors, officers, employees or owners of the employer; any employee organization whose members are plan participants; plan fiduciaries; and plan service providers.
Plan Administrator
The individual, group or corporation named in the plan document as responsible for day-to-day operations. The plan sponsor is generally the plan administrator if no other entity is named.
Plan Document
The parameters under which a retirement plan will be operated must be outlined in the plan document. This document must be given to employees upon request.
Plan Loan
Loan from a participant’s accumulated plan assets, not to exceed 50 percent of the balance or $50,000, less the amount of any outstanding loans. This is an optional plan feature.
Plan Sponsor
The entity responsible for establishing and maintaining the plan.
Plan Year
The calendar, policy or fiscal year for which plan records are maintained.
Portability
This occurs when, upon termination of employment, an employee transfers pension funds from one employer’s plan to another without penalty.
Prohibited Transaction
Activities regarding treatment of plan assets by fiduciaries that are prohibited by ERISA. This includes transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties.
Profit Sharing Plan
Company-sponsored plan funded only by company contributions. Company contributions may be determined by a fixed formula related to the employer’s profits, or may be at the discretion of the board of directors.
Prudent Man Rule
ERISA fiduciary law that requires all fiduciaries to conduct the business of the plan with prudence and care. Any fiduciary violating this law is liable to the plan and its participants for all losses.
Q
Qualified Domestic Relations Order (QDRO)
A judgment, decree or order that creates or recognizes an alternate payee’s (such as former spouse, child, etc.) right to receive all or a portion of a participant’s retirement plan benefits.
Qualified Joint and Survivor Annuity (QJSA)
An annuity with payments continuing to the surviving spouse after the participant’s death, equal to at least 50 percent of the participant’s benefit.
Qualified Plan
Any plan that qualifies for favorable tax treatment by meeting the requirements of section 401(a) of the Internal Revenue Code and by following applicable regulations. Includes 401(k) and deferred profit sharing plans.
R
Rollover
The action of moving plan assets from one qualified plan to another or to an IRA within 60 days of distributions, while retaining the tax benefits of a qualified plan.
S
Safe Harbor Rules
Provisions that exempt certain individuals or kinds of companies from one or more regulations.
Salary Deduction
Also known as payroll deduction. When a plan participant arranges to have pre-tax contributions made directly from their paycheck, it is arranged through salary deduction.
Savings Incentive Match Plan for Employees
A type of defined contribution plan for employers with 100 or fewer employees in which the employer matches employee deferrals up to 3 percent of compensation or provides non-elective contributions up to 2 percent of compensation. These contributions are immediately and 100 percent vested, and they are the only employer contribution to the plan. SIMPLE plans may be structured as individual retirement accounts (IRAs) or as 401(k) plans.
Service Provider
A company that provides any type of service to the plan, including managing assets, recordkeeping, providing plan education, and administering the plan.
Schedule SSA
A form that must be filed by all plans subject to ERISA Section 203 minimum vesting requirements. The schedule, which is attached to Form 5500, provides data on participants who separated from service with a vested benefit but were not paid their benefits.
Simplified employee-pension plan (SEP)
A defined contribution plan in which employers make contributions to individual employee accounts (similar to IRAs). Employees may also make pre-tax contributions to these accounts. As of January, 1997 no new SEP plans may be formed.
SIMPLE Plan
See Savings Incentive Match Plan for Employees.
Stock Bonus Plan
A defined contribution plan in which company contributions are distributable in the form of company stock.
Summary Annual Report
A report that companies must file annually on the financial status of the plan. The summary annual report must be automatically provided to participants every year.
Summary Plan Description (SPD)
A document describing the features of an employer-sponsored plan. The primary purpose of the SPD is to disclose the features of the plan to current and potential plan participants. ERISA requires that certain information be contained in the SPD, including participant rights under ERISA, claims procedures and funding arrangements.
Summary of Material Modifications
A document that must be distributed to plan participants summarizing any material modifications made to a plan.
T
Target-benefit plan
A type of defined contribution plan in which company contributions are based on an actuarial valuation designed to provide a target benefit to each participant upon retirement. The plan does not guarantee that such benefit will be paid; its only obligation is to pay whatever benefit can be provided by the amount in the participant’s account. It is a hybrid of a money-purchase plan and a defined-benefit plan.
Tax Sheltered Annuity (TSA)
See 403(b) plan.
Top Heavy Plan
A plan in which 60 percent of account balances (both vested and non-vested) are held by certain highly compensated employees.
Trustee
The individual, bank or trust company having fiduciary responsibility for holding plan assets.
V
Vesting
The participants’ ownership right to employer contributions.
Vesting Schedule
The structure for determining participants’ ownership right to employer contributions (see matching contributions). In a plan with immediate vesting, participants own all employer contributions as soon as they are deposited into individual accounts. In cliff vesting, company contributions will be fully owned (i.e., vested) only after a specific amount of time, and employees leaving before the allotted time are not entitled to any company contributions (with certain exceptions for retirees). In plans with graduated or graded vesting, vesting occurs in specified increments.