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77 Cards in this Set
- Front
- Back
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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
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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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Adoption agreement |
That portion of the master or prototype plan document that contains all of the alternatives and options that may be selected by an adopting employer |
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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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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) |
A series of equal periodic payments. The usual form of distribution used by defined benefit plans |
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C corporation |
Synonymous with corporation. When a business incorporates, it does so as a C corporation unless a special tax election is made to become an S corporation |
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Cash balance pension plan |
A defined benefit plan that provides for specific annual employer contributions that accumulate at a guaranteed rate of investment return |
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Common trust |
A trust, often sponsored by a bank trust department or trust company, that receives plan contributions, invests them, and pays out benefits when due. |
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Corporation |
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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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 |
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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Direct rollover
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A tax-free transfer of cash or other property between two qualified plans or IRAs, where the transferred cash or property never passes through the hands of the owner |
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Distribution |
Any outflow from a retirement plan |
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Early (or premature) distribution |
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 |
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
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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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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 benefit plan
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A plan maintained by an employer solely to provide benefits for certain employees in excess of the limitations on contributions and benefits imposed by IRC Section 415 |
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Excess contributions |
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 |
An approved vesting schedule for defined benefit plans 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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Flat amount formula
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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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Flat percentage formula
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An approach to determining retirement benefits in a defined benefit plan that uses a flat percentage of compensation at retirement. |
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Forfeitures |
Unvested benefits left in a retirement plan by departing plan participants |
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Frozen plan |
A qualified retirement plan that continues to exist but whose employer contributions have been discontinued. Benefits for plan participants no longer accrue, and distributions have been suspended. |
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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 |
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) |
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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Individually designed, or custom-designed plan |
A retirement plan that is drafted to meet the specific needs of a particular sponsoring employer. Individually designed plans are not preapproved by the IRS |
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Investment policy |
A coherent set of guidelines for managing financial assets that is in line with stated objectives and the realities of investment markets. |
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Joint and survivor annuity
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An annuity that continues to pay benefits as long as either the retiree or his or her spouse continues to live. It is the automatic payment option for defined benefit plans |
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Life annuity
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A series of equal payments (typically monthly) made to a recipient over his or her remaining lifetime. |
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Limitation year |
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 |
A distribution representing the entire amount of a participant's qualified plan account balance |
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Master plan |
A retirement plan sponsored by a financial institution that an employer can adopt by simply executing a participation agreement. Its plan documents have already been examined an approved by the IRS |
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Master trust |
A trust that incorporates a number of pension plans, with several managers participating in a single investment pool. The master trust provides central custodianship of assets, allocation of monies among various money managers, separate accounting but consolidated reporting for all the pension plans and investment managers, analytical and consulting services , and centralized cash management |
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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) 2 employees. This test is commonly known as the 50/40 test. If a company employs only one person, that person's participation would meet the minimum participation requirement |
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Money purchase pension plan
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A qualified defined contribution plan in which the employers is required to contribute a percentage of covered payroll (up to 25%) to the plan each year |
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Normal retirement age |
When this term is used in qualified plan documents, it may refer to an age that differs from the Social Security full retirement age. In qualified plans normal retirement age is the earlier of (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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Opinion letter |
A written statement issued by the National Office of the Internal Revenue Service (IRS) to a sponsoring organization to address the acceptability of the form and terminology of a master or prototype plan, as well as any related trust or custodial account documentation |
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Participant-directed plan |
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 |
An unincorporated business with two or more owners |
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Pension benefit guaranty corporation (PBGC) |
The PBGC is a nonprofit corporation that is responsible for insuring certain qualified defined benefit pension plans. It was established by ERISA to guarantee that a certain amount of the benefits promised under defined benefit plans will be received by plan participants and beneficiaries, even if these plans lack sufficient assets to provide the benefits in the event of termination |
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Pension plan |
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 |
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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Pooled trust
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A trust sponsored by one employer to combine and accumulate the assets of different plans of the employer and its subsidiaries |
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Profit sharing plan |
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 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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Projected benefit method |
A method for calculating and funding a defined benefit plan that looks ahead to each participant's retirement date, projects the benefit the plan must pay at that point, and amortizes the total cost of all benefits over the intervening years. |
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Prototype plan
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A plan made available by a sponsoring organization for adoption by employers. Like a master plan, it consists of a basic plan document and an adoption agreement. Unlike a master plan, a separate funding medium is available to each adopting employer, and plan administration is the responsibility of the adopting employer. |
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Prudent man rule |
A long-standing rule that requires that fiduciaries act as a prudent man or woman would be expected to act when handling the assets of others - namely, they must exercise discretion and intelligence as they seek reasonable income and the preservation of capital. by definition, the prudent man or woman will avoid speculation when making investments. |
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Qualified joint and survivor annuity
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An annuity that pays benefits as long as either the retiree or his or her spouse continues to live. In effect, it is a life annuity that considers two lives |
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Qualified optional survivor annuity (QOSA)
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An annuity paid over life of the participant, with a survivor annuity benefit payable over the life of the participant's spouse that is equal to applicable percentage of the annuity payable over the joint lives. The applicable percentage of the optional survivor annuity is 75% if the survivor annuity benefit is less than 75% of the annuity benefit payable over the joint lives of the participant and spouse. If the survivor annuity benefit is equal to or greater than 75% of the annuity benefit payable over the joint lives of the participant and spouse, the applicable percentage is 50%. |
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Qualified plan
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A retirement plan that meets the stringent requirements of Section401(a) of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA). Qualified plans have unique tax advantages for employers and plan participants. |
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Rollover |
A tax-free transfer of cash or other property from one retirement plan to another
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S corporation
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A closely held corporate entity governed by a distinct and separate set of tax rules and restrictions found in the Internal Revenue Code, resulting in the corporation being taxed like a partnership |
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Section 401(k) plan |
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 403(b) plan |
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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Sole proprietorship
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A business owned by a single individual |
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Standardized plan
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A master or prototype plan that provides limited options to be selected by an employer. Generally, most of the plan's terms are predetermined by the sponsoring organization |
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Stock bonus plan |
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 changes in compensation; the targeted benefit level may or may not be reached, depending on the performance of fund investments |
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TDA plan
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Tax-sheltered annuity plan See Section 403(b) plan |
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Three-to-seven-year graded vesting |
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 |
A qualified retirement plan in which more than 60% of plan benefits are attributed to key employees |
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Trustee |
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 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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Unfunded plan |
A plan under which an employer promises to pay future benfits to one or more employees from the employer's general assets. The company's promise is not secured or guaranteed in any way. |
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Unit benefit formula |
A benefit formula that credits retirement benefits in a defined benefit plan according to a fixed percentage or dollar amount per year of service or participation. Example: $60,000 * 20 Years of Service * 2% results in a retirement benefit of $24,000 per year
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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. |
