Crps Exam Module 4

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Accrued benefit

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A benefit that has accumulated up to a particular point in the participant's employment

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Accrued benefit method

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A method of calculating and funding defined benefit plan liabilities accruing in a particular year. This method looks at the plan's benefit accrual for the year for each participant at normal retirement and funds the present value of the benefit for that year.

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ACP test

Back 3

A discrimination test that involves a percentage comparison of the matching contributions and nonelective employer contributions made on behalf of nonhighly compensated employees with the matching contributions and nondeductible employee contributions made on behalf of highly compensated employees.

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ADP test

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A nondiscrimination test that compares the deferral rates of nonhighly compensated participants with the deferral rates of highly compensated participants in the same 401(k) plan.

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Age-weighted profit sharing plan

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A type of qualified retirement plan that allocates employer contributions based on compensation and age.

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Annuity (insurance product)

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A periodic payment. In insurance terms, an annuity is a form of policy or payout arrangement that provides a specified periodic cash payment to the annuitant

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Annuity (qualified plans)

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A series of equal periodic payments. The usual form of distribution used by defined benefit plans.

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Cash balance pension plan

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A defined benefit plan that provides for specific annual employer contributions that accumulate at a guaranteed rate of investment return.

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Cash or deferred arrangement (CODA)

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An arrangement whereby a participating employee can choose between taking compensation in the form of cash or deferring a portion of it until the future.

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Catch-up provision

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A provision found in both 403(b) and 457 plan that allows an eligible employee to make higher annual contributions in the years just prior to retirement.

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Common trust

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A trust, often sponsored by a bank trust department or trust company, that receives plan contributions, invest them, and pays out benefits when due.

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Conduit IRA

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An unofficial term for an IRA used to "park" a distribution from one qualified plan until it can be rolled over to another qualified plan. With a conduit IRA, the forward-averaging potential of the distribution can be preserved.

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Corporation

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An entity of indeterminate life owned by one or more parties. Ownership is evidenced by shares of stock, each representing a fractional interest in the entity.

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Cross-tested profit sharing plan

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A type of qualified retirement plan that allocates proportionately larger employer contributions to highly compensated participants than it does to other plan participants

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Death benefit only plan

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A plan in which the only benefit provided is a death benefit to the employee's designated beneficiary.

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Deductible IRA

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An individual retirement account that allows the owner to deduct the amount of the contributions from current federal income taxes

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Deferred compensation

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Income that is not currently payable to an employee but that is payable in the future.

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Defined benefit plan

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A qualified retirement plan that defines what the benefit will be at retirement

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Defined contribution plan

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A qualified retirement plan that provides an individual account for each participant and specifies the annual contributions that each employee receives (the benefits of each employee are based upon the value of his or her account at retirement)

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Determination letter

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A letter issued by the IRS indicating whether or not a particular plan meets the IRS's requirements.

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Discretionary nonelective profit sharing contributions

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These are discretionary year-end contributions that an employer uses to supplement employee elective contributions and matching contributions. They are based on profitability or company performance and may be a flat amount

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Disqualified person

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As defined by the IRS, any person or entity prohibited by the IRC from entering into certain transactions with a qualified plan because of the person's relationship with the plan - such as fiduciary or plan sponsor

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Distribution

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Any outflow from a retirement plan

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Early (or premature) distribution

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A distribution from a qualified plan, an IRA, or a 401(k), Keogh, or similar plan that takes place before the recipient has reached age 59 1/2 and is not associated with a rollover

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Early (or Premature) withdrawal

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A distribution from an IRA or other tax-favored retirement plan by a participant prior to the age of 59 1/2 that is not associated with a rollover

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Elective contribution

Back 26

A contribution made to a 401(k) plan by an employer on an employee's behalf pursuant to the agreement for salary deferral.

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Elective deferral

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A deferral of compensation made by the employee participant of a CODA plan

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Employee stock ownership plan (ESOP)

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A profit sharing or stock bonus plan in which the funds must be invested primarily in the employer's securities. An ESOP may borrow in order to purchase the company stock.

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Employer contributions

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Elective deferrals, nonelective contributions, and discretionary profit sharing contributions to a qualified plan.

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Excess contributions

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The excess of the elective contributions made to a 401(k) plan for highly compensated employees for the plan year that are over the maximum amount of such contributions permitted under the ADP test for the year.

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Fiduciary

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an individual or organization that has discretionary authority or control over a qualified plan trust, its assets, or its administration, or that - for compensation - provides investment advice regarding plan assets.

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Five-year cliff vesting

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An approved vesting schedule in which the participant is fully vested in his or her benefits at the completion of five years of service. Under this schedule, the participant who is terminated or leaves the company prior to five years of service has no right to any benefits in the plan.

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Five-year rule

Back 33

An IRS rule stating that all of a deceased's funds in qualified plans, IRAs, and so forth, must be distributed within five years to the end of the year in which the individual died. The only exception to this is when the retirement vehicle names a designated beneficiary.

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Flat amount formula

Back 34

An approach to determining the retirement benefit in a defined benefit plan that promises each participant an annual flat dollar amount for each year of service

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Forfeitures

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Unvested benefits left in a retirement plan by departing plan participants

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Forward averaging

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A method of calculating taxes on a lump-sum distribution that may result in a lower rate than would otherwise apply.

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Funded plan

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A plan for which cash or property is actually set aside for the benefit of the employee

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Indirect rollover

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A transfer of cash or other property between qualified plans or IRAs in which the owner takes temporary receipt of the funds. The rollover is tax free and without penalty if completed by the 60th day after the distribution from an IRA or an employer plan

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Individual retirement account (IRA)

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A special custodial or trust account implemented through brokerage firms, banks, insurance companies, mutual funds, and various other financial institutions. In all cases, earnings accumulate within an IRA on a tax-deferred basis. In some cases, the amount of the individual's contribution to an IRA is deductible from his or her current taxable income

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Integration level (integration point)

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The point at which the compensation of an individual plan participant is divided into base compensation and excess compensation for the purpose of integrating a qualified plan. Typically, it is the Social Security wage base.

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Keogh (HR 10) plan

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A qualified retirement plan for self-employed individuals established through a sole proprietorship or partnership (it is not designed for individual partners) Keoghs can be established either as defined contribution or defined benefit plans

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Limitation year

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A consecutive 12-month period that is established for a qualified plan to ensure that Section 415 limitations are not exceeded.

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Lump-sum distribution

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A distribution representing the entire amount of a participant's qualified plan account balance

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Minimum participation requirement

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Defined benefit plans are required to meet certain minimum participation requirements. On each day of the plan year, a defined benefit plan must cover the lesser of 50 employees or the greater of (1) 40% of all employees or (2) two employees. This test is commonly known as the 50/40 test. If a company employees only one person, that person's participation would meet the minimum participation requirement.

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Money Purchase pension plan

Back 45

A qualified defined contribution plan in which the employer is required to contribute a percentage of covered payroll (up to 25%) to the plan each year

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Nondeductible IRA

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An individual retirement account in which contributions may not be deducted from current taxable income

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Nonelective deferral

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A plan contribution by the employer based on a percentage of the participant's compensation; not related to the amount deferred by the participant (for example, in a SIMPLE plan, 2% of employee compensation)

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Normal retirement age

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In qualified plans - normal retirement plans - normal retirement age is the earlier of the following: 1) the normal retirement age specified in the plan 2) the later of age 65 or five years after plan participation began.

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Participant-directed plan

Back 49

A defined contribution plan in which each participant is allowed to choose how to invest the assets held in his or her account.

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Partnership

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An unincorporated business with two or more owners.

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Pension plan

Back 51

There are two types of pension plans: defined benefit pension plans and defined contribution pension plans. A defined benefit plan is a qualified retirement plan that provides a specified retirement benefit to participants. A defined contribution pension plan is a qualified retirement plan that usually provides for periodic contributions specified in a written formula and an unspecified retirement benefit equal to the value of the participant's account balance at retirement

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Plan administrator

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The individual or organization charged with the primary responsibility of carrying out the operational requirements of the plan.

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Plan Year

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Any 12-month period during which the plan chooses to keep its annual records. In most cases, this period will be either the calendar year or the fiscal year of the plan sponsor.

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Profit Sharing Plan

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A qualified defined contribution plan that features a provision for flexible contributions from the employer to the accounts of eligible employees according to some percentage or formula. In most cases, the contributions bear some relationship to the employer's annual profits. However, some profit sharing plans such as a 401(k) plans and other arrangements provide that contributions will be made, even if there are no employer profits.

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Prohibited transaction

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Generally, any direct or indirect dealing or transaction between a qualified plan or IRA and a disqualified person or party in interest.

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Qualified matching contributions (QMACs)

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Discretionary employer matching contributions that must be 100% vested at all times and are subject to the same distribution restrictions as employee elective deferrals.

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Qualified nonelective employer contributions (QNECs)

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Discretionary employer nonelective contributions that must be 100% vested at all time and are subject to the same distribution restrictions as employee elective deferrals.

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Qualified plan

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A retirement plan that meets the stringent requirements of Section 401(a) of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA)

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Rollover

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A tax-free transfer of cash or other property from one retirement plan to another

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Roth IRA

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A nondeductible IRA with several unique features. Withdrawals are not taxable if left in the account for five years, the owner may continue to make contributions to the account after he or she is age 70 1/2, and there is no required beginning date for withdrawals.

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Salary Reduction agreement

Back 61

A formal agreement between the employer and employee under which the employee agrees to take a reduction in salary or to forgo a salary increase. Typically the agreement requires the employer to deposit the deferral into a benefit plan, such as a 403(b), 401(k), thrift, or cafeteria plan. The agreement may state a specific dollar amount of salary reduction or a percentage compensation reduction.

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SARSEP

Back 62

A salary reduction plan that is available only to companies with 25 or fewer employees. What distinguishes a SARSEP from other SEPs is the opportunity for employees to elect to contribute a portion of their pay on a pretax basis. Under current law, new SARSEPs cannot be established. Those established prior to 1997, however, can continue to be funded.

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Savings incentive match plan for employees (SIMPLE)

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An employer-sponsored retirement plan that can be either an IRA for each employee or part of a 401(k) plan. Available to employers with 100 or fewer employees who earn at least $5,000 a year and who do not participate in any other qualified plans.

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Section 401(k) plan.

Back 64

A plan in which employees may choose to defer compensation on a before-tax basis and have those deferrals invested for retirement purposes. Such plans often include employer matching contributions and employer discretionary profit sharing contributions.

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Section 401(k) stock bonus plan (also called a KSOP)

Back 65

A 401(k) plan in which contributions are invested in the employer's stock.

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Section 403(b) plan

Back 66

A retirement plan that allows the employee to defer compensation and defer taxes on both that compensation and its earnings. This plan is sometimes called a tax-sheltered annuity (TSA). Employers may make additional contributions. Section 403(b) plans are available only to employees of public school systems and tax-exempt organizations specified in the Internal Revenue Code.

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Section 457 plan

Back 67

A retirement plan that enables employees of state and local governments and nonprofit organizations to defer taxation on salary-reduction contributions. Similar to a 401(k) plan but not to a qualified plan.

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Simplified employee pension (SEP)

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A pension plan established by a business on behalf of its employees; contributions are deposited into the individual retirement accounts (IRAs) of the employees.

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Sole proprietorship

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A business owned by a single individual.

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Stock bonus plan

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a profit sharing plan in which employer contributions generally are made with employer shares. Employee stock ownership plans (ESOPs) and leveraged employee stock ownership plans (LESOPs) are the most common types of stock bonus plans.

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Summary plan description (SPD)

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A detailed, reader-friendly description of benefit plan provisions that must be provided to all plan participants and beneficiaries.

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Target benefit plan

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A defined contribution plan that establishes a fixed contribution formula based on an initial actuarial determination of the contributions required to provide a predefined benefit at retirement. No subsequent adjustments are made to the annual contribution except those related to the addition of new participants or to changes in compensation; the targeted benefit level may or may not be reached, depending on the performance of fund investments.

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Tax deductible

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Expenses that may be deducted from current taxable income

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Tax deferred

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Earnings or income that is not subject to federal income taxes until a later date. With reference to tax-deferred earnings produced within an IRA, these earnings are taxed only upon distribution to the account owner.

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TDA plan

Back 75

Tax-deferred annuity plan See Section 403(b) plan

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Three-to-seven year graded vesting.

Back 76

An approved schedule in which vesting must occur at a rate of at least 20% per year, beginning at the completion of three years of service. The participant is fully vested at the completion of seven years of service.

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Top-heavy plan

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A qualified retirement plan in which more than 60% of plan benefits are attributed to key employees.

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Trustee

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A party named in the plan document (or in the trust instrument itself) that is authorized to hold(or invest) the assets of the plan for the benefit of its participants. The trustee has a fiduciary responsibility toward the plan and its participants.

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TSA Plan

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Tax-sheltered annuity plan. See Section 403(b) plan

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Vesting

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A process in which the percentage of a retirement plan benefit that a participant actually "owns" increases over time; such a benefit can be taken by the participant when he or she leaves the company.