Glossary of Retirement Plan Terms
401(k) - Refers to the specific section of the Internal Revenue Code that permits employees to contribute a portion of their compensation to a qualified plan on a Pre-tax basis. These plans are also called "cash or deferred arrangements". Amounts contributed to the plan are not taxable to the participants until withdrawn. Amounts to be deposited are determined by the employee. The employer permits formula matching, discretionary matching, pure discretionary or profit sharing contributions, and formula contributions. The Plan Document controls this. Fiduciary responsibilities rest with the employee.
benefits - The benefits a plan participant has already
accrued in a defined benefit plan, based on his or her salary and service to date.
- Cash balance
plan - A type of defined benefit pension plan that uses a formula that is different from a traditional plan to determine benefits. The plan is considered a defined benefit plan because the employer bears the investment risks and rewards and the mortality risk if the employee elects to receive benefits in the form of an annuity.
Conduit IRA - A conduit IRA is an account established at
a financial institution through which a transfer may be made from
one qualified plan to another. Unlike a traditional IRA it is an
individual retirement arrangement (IRA) that serves as a holding
account. Qualified retirement plan money is rolled over tax-free
between employer plans with a temporary layover in the conduit IRA.
Defined benefit pension
plan - A plan that specifies the pension benefit the employee will receive, usually as a function of one or more factors such as age, years of service or compensation. The employer’s annual contribution is determined on an actuarial basis, taking into consideration the employee’s age and salary history, the performance of the fund’s investments and ERISA requirements.
A contractual commitment by an employer to an employee to pay
compensation in a future tax year.
- Defined contribution
plan - A plan that maintains an individual account for each participant and specifies how contributions to the account are determined instead of specifying the amount of benefits the individual will receive. Individual account balances are based on employer and employee contributions, investment experience and allocated forfeitures.
- The employer
has the option of making contributions to the plan at his choice
regardless of the profit level of the corporation that year.
This type of contribution is usually a deferral or percentage of a
participant’s salary. When
an eligible employee decides to contribute a percentage of their
paycheck to the 401(k) plan they are making an “elective”
Group meetings with employees to explain the employer's 401(k)
plan and the investment accounts available.
- Employee Retirement Income Security Act.
extension of an organization's intranet, especially over the World
Wide Web, enabling communication between the institution and
people it deals with, often by providing limited access to its
A means by which a participant
may withdraw money from their 401(k) account prior to attaining
The following four items are considered by the IRS as acceptable reasons
for a hardship withdrawal:
expenses for you, your spouse, or dependents.
Purchase of an employee’s
Payment of college tuition and related educational costs such as room
and board for the next 12 months for you, your spouse, dependents, or
children who are no longer dependents.
Payments necessary to prevent
eviction of you from your home, or foreclosure on the mortgage of your
Beginning on January 1, 2006,
you will also be able to make a hardship withdrawal for funeral
expenses and repair of a primary residence.
Hardship withdrawals are
subject to income tax and, if your are not at least 59½ years of age,
the 10% withdrawal penalty. You do not have to pay the withdrawal amount
- An employee
owning more than five percent of the company or earning more than
$95,000 in 2005.
credits - In addition to annual pay credits (see below), a participant’s account under a cash balance formula is credited annually with interest. The interest rate the plan uses may be fixed or variable, although many cash balance plans use a variable rate for interest credits, linking the rate to an index such as one-year Treasury bills.
- Allows participants to access their plan funds without extra tax
costs or penalty. The plan must specifically permit loans before
participants may borrow. Check
your plan SPD.
An employer contribution to a plan that is allocated on the basis
of the employee's elective contribution. A matching contribution
may be either mandatory or discretionary.
date - The date plan assets (stocks and bonds) and plan obligations (pension liabilities) are determined based on actuarial assumptions.
Negative plan amendment - Plan amendments that reduce a company’s projected benefits obligation to the benefits the participant has already earned. Such amendments generally reduce an employer’s annual pension cost. ERISA regulations do not permit a company to reduce a participant’s already accrued benefits.
A written plan that allows an employer to discriminate in favor of
highly compensated employees.
who actually make deposits into their 401(k) plan. Not all
employees become participants or are eligible to participate.
The plan participants are provided the opportunity to direct their
own retirement assets/dollars by making investment choice in funds
that more closely meet their specific goals and objectives.
Trustee Directed plans do not permit the participants to invest
their own assets, but rather, the assets are invested in
investments selected by the plan's Trustees.
Scheduled meetings between Plan Consultants and Participants to
review and update individual retirement plan goals and objectives.
The plan document is filed with the Department of Labor and the
IRS and governs the plan sponsor, the Trustees, investment
providers, plan administrators, and participants.
This document is what provides your plan its tax qualified
status. The Summary
Plan Description or SPD provides an overview of the plan document.
A Business or Employer Organization that sponsors the qualified
retirement plan and is ultimately responsible for its
Contributions are made to a retirement plan before taxes are
calculated. Your gross pay is reduced by the amount contributed to
a retirement plan.
- Profit Sharing -
A profit sharing contribution is a percentage of compensation paid by the employer to all employees meeting eligibility requirements set by the plan document. An employer is not required to make a profit sharing contribution however, at the employers discretion, may do so on an annual basis. While the money is deposited to each eligible employee account and you may generally invest it as your money, you must satisfy vesting requirements before you fully control a profit sharing contribution.
- Qualified Plan -
A plan that meets Internal Revenue Code and IRS regulatory requirements that entitles the employer to an immediate tax deduction when benefits are funded.
credits - After a company determines a participant’s opening account balance under a cash balance formula, the account is credited annually with an amount based on a percentage of the participant’s annual compensation. These pay credits may be level for all age groups or graduated—lower for younger age groups and higher for older age groups.
- A process by which the system will automatically create
transfers between investment funds to achieve the desired asset
allocation. Rebalancing can be executed a single time, or
established so that transfers will automatically occur at certain
- Acronym for Summary Plan Description (see below).
plan’s Summary plan Description summarizes the Qualified Plan
Document and is generally does not provide the detail available in
the Plan Document. Also
referred to as the SPD it is available to all persons eligible to
participate in the plan. If
you do not have your SPD you may request one form your plan
income tax is not paid on contributions or earnings to a
retirement plan until the money is withdrawn.
Heavy Plan -
A plan that provides more than 60 percent of its aggregate accrued
benefits or account balances to "key" or "highly
- Who is
considered a 'key' employee?
• An officer of the employer with compensation greater than
the amount under section 416(i)(1)(A)(i). This amount is $140,000 for 2006
and $145,000 for 2007 (subject to
cost-of-living adjustments), or
- • A 5% owner
of the employer, as defined in section 416(i)(1)(B)(i) of
the Internal Revenue Code, or
- • A 1% owner
of the employer with compensation greater than $150,000.
- If a Plan is
top-heavy or deemed top-heavy, contributions must be made for
all non-key employees equal to the lesser of 3% of compensation
or a percentage equal to the highest contribution rate of any
benefits - Additional benefits the plan sponsor provides to
certain employees when the plan is amended or upon other circumstances,
such as the sale of part of a business, to ensure that the new benefits
the plan provides are somewhat equivalent to those a participant would
have earned under the prior plan.
Trustee Directed - The plan's Trustees have the fiduciary responsibility to select the investment vehicles and invest the plan assets for all eligible plan participants.
Vesting - Refers to an
employee's ownership of plan contributions. Employees are always 100%
vested in their own contributions. Employer contributions become 100%
vested after a predetermined stated period of time.
Wear-away period - After a cash balance plan conversion,
additional benefits do not accrue to a participant until the accrued
benefits payable under the cash balance formula equal the benefits
accrued under the traditional defined benefit plan. A participant may
have to work several years before he or she earns pension benefits above
the benefits accrued at the time of the cash balance conversion. The
wear-away period is the amount of time it takes for benefits to catch
up, when the participant is not earning new benefits.
Successor Plan Rule