401(k)
A defined contribution plan in which participants may instruct their employer
to deduct a portion of their pay which is then contributed to the plan
in their name. Such contributions are often referred to as deferrals,
in reference to the fact that most taxes on the contributed compensation
are deferred until the money is distributed from the 401(k) plan.
Accrued Benefit
In a defined benefit plan the accrued benefit is the portion of a participant's
retirement benefit that has been earned to date. The method of accrual
is specific to each plan and laid out within the plan document.
ACP
The Actual Contribution Percentage Test applies to any plan that accepts
matching or employee after-tax contributions and is used to determine
if those contributions were discriminatory in the favor of Highly Compensated
Employees. The ACP test must be satisfied in order for a plan to remain
qualified and eligible for favorable tax status.
Actuary
An actuary is one who calculates insurance and annuity premiums, reserves,
and dividends. Defined benefit plans are required to retain the services
of an enrolled actuary. An Enrolled Actuary is an actuary who has been
licensed under the Joint Board of the Department of Treasury & Department
of Labor to perform a variety of actuarial tasks that are required for
pension plans in the United States.
ADP
The Actual Deferral Percentage Test compares the deferral rates of Highly
Compensated Employees and non-Highly Compensated Employees to determine
if such contributions were discriminatory in favor of the Highly Compensated
Employees. The ADP test must be satisfied in order for a plan to remain
qualified and eligible for favorable tax status.
Defined Benefit (DB) Plan
A defined benefit plan promises to pay a specific benefit at retirement
age. The plan's sponsor assumes the investment risk and is obligated to
pay the accrued benefits regardless of any gains or losses in the plan's
accumulated trust fund.
Defined Contribution (DC) Plan
A defined contribution plan allocates contributions to a participant's
account in the manner defined in the plan document. The participant's
benefit from the plan is the accumulated value of their account at retirement
or termination of employment.
ERISA
The Employee Retirement Income Security Act of 1974 was enacted to ensure
that employees receive the pension and other benefits promised by their
employers. ERISA is tied to provisions of the Internal Revenue Code. The
provisions of ERISA and the IRC are intended to ensure that tax-favored
pension plans do not favor Highly Compensated Employees over rank-and-file
employees in the way benefits are provided.
Form 5500
This form, and its applicable schedules & attachments, is filed annually
with the Department of Labor. Its purpose is to ensure the plan is operated
in compliance with ERISA and the Internal Revenue Code and to provide
the participants greater awareness of their rights.
Highly Compensated Employee
Generally, a highly compensated employee is defined as follows:
- Any employee who owns (directly or indirectly) more than 5% of the business.
- Any employee whose annual compensation exceeds $105,000
in the prior year
(as indexed for 2008).
Integration
Integration is the practice of considering the anticipated Social Security
Benefits of participants when determining benefits from or contributions
to the plan.
Key Employee
A key employee is any employee who fits into the following classifications:
- An officer whose annual compensation exceeds $150,000 (as indexed for 2008).
- An employee who owns (directly or indirectly) more than 5% of the business
- An employee who owns (directly or indirectly)
more than 1% of the business
and whose annual compensation exceeds $150,000.
PBGC
The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation
created by the Employee Retirement Income Security Act of 1974 (ERISA)
to encourage the continuation and maintenance of defined benefit pension
plans, provide timely and uninterrupted payment of pension benefits to
participants and beneficiaries in plans covered by PBGC, and keep pension
insurance premiums at the lowest level necessary to carry out the Corporation's
objectives.
PDF
Acronym for Portable Document Format, a file format developed
by Adobe Systems. PDF files preserve formatting information from a variety
of desktop publishing applicaions, making it possible to present them
so they appear on the recipient's monitor or printer as they were intended.
To view a file in PDF format, you need Adobe
Reader, a free application distributed by Adobe Systems.
Plan Administrator
As designated by the plan document, the Plan Administrator is the individual
or entity responsible for managing the day-to-day affairs of the plan.
Plan Document
The written compilation of the benefits a plan offers and the rules that
govern them.
Plan Sponsor
This is the entity (employer) that establishes the plan.
Profit Sharing Plan
A profit sharing plan is a type of defined contribution plan. The allocation
method must be laid out in the plan document but the amount of the contribution,
if any, can be discretionary.
Top Heavy Plan
A plan is generally a top heavy plan when more than 60% of the plan assets
are attributable to key employees. If the plan becomes top heavy in any
plan year, non-key employees will be entitled to certain "top heavy
minimum benefits," and other special rules will apply.
TPA
A Third Party Administrator is an entity or individual hired to provide
purely ministerial services for the plan. TPAs aid in the administration
of the plan but the liability remains solely with the plan's sponsor and
trustees.
Trustee
The entity, person, or persons named in the plan document, who shall be
responsible for the prudent management of the plan's assets.
Vesting Schedule
In a retirement plan, plan sponsors may require a certain number of years
of service in order to earn 100% of the retirement benefits that have
been credited to the participant. The participant earns (vests) a certain
percentage of his benefit each year based on the vesting schedule. The
most common vesting schedule is the 6-year-graded. Under this schedule
a participant earns 20% of his benefit after 2 years of service and 20%
each year thereafter until 100% has been reached.
