Glossary

Showing: Plan Design

NUM

401(a)
A 401(a) is a retirement plan that employers set up and that meet the qualification requirements of the Internal Revenue Code (IRC), Section 401(a). Section 401(a) defines 401(a) qualified trusts and details the various qualification rules of a 401(a) plan. Each state has specific laws governing 401(a) plans and a 401(a) plan must be either created or organized in the United States. Under a 401(a) plan, the employer determines the amount of money to be contributed each year (i.e. by the employee, the employer or both), vesting schedules and eligibility requirements that may be tied to job performance as a way to retain key employees. Under 401a, employers are allowed to create different 401a plans for different groups of employees, giving the employer flexibility in creating different incentive programs for specific employee categories. However, there are specific non-discriminatory requirements (i.e. detailed in IRC Section 401(a)5) that a 401(a) plan must adhere to. Funds from 401(a) plans may be distributed through lump-sum payments, rollovers, or annuity payments.

401(k) Plan
A defined contribution plan offered by a corporation to its employees, which allows employees to set aside tax-deferred income for retirement purposes, and in some cases employers will match their contribution dollar-for-dollar. Taking a distribution of the funds before a certain specified age will trigger a penalty tax. The name 401(k) comes from the IRS section describing the program.

401(k) Profit Sharing Plan
A type of profit sharing plan that includes an elective salary deferral provision. The employer typically has the ability to make a matching contribution that is tied to the elective salary deferral, as well as a profit sharing contribution that is allocated to all eligible participants.

401(m)
Tax code section requiring nondiscrimination testing of employer matching and after tax contributions (see Actual Contribution Percentage).

403(b) Plan
Also known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA), is an employer sponsored retirement savings plan for employees of not-for-profit organizations, such as colleges, hospitals, foundations and cultural institutions.

457 Plan
A tax-deferred retirement savings plan available to state and municipal employees. Like traditional 401(k) and 403(b) plans, the money contributed and any earnings that accumulate are not taxed until withdrawn.

A

Affiliated Service Group
Two or more entities having a service and possible ownership relationship.

Age-weighted Profit Sharing
A type of profit sharing allocation where participant’s age, or length of time until retirement, is factored into the allocation formula on an individual basis, so older participants receive a larger proportionate share of the contribution.

Automatic Contribution Arrangement
Also known as Automatic Enrollment. The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate.

Automatic Enrollment
The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. After the Pension Protection Act of 2006, there are two new Automatic Contribution Arrangements, the EACA and the QACA options. See definition in this section.

Automatic Rollover
The transfer of a small amount of funds, less than $5,000, from one IRA to another owned by the same person without the owner's authorization.

B

Break in Service
Generally, a 12-month computation period in which an employee is credited with no more than 500 hours of service.

C

Cash-Out (Mandatory)
Applies to plans that have a provision in their document that forces the distribution of a terminated participant. This can happen without the participant's consent, but is only allowed if the benefit is less than $5,000. Unless the participant elects otherwise, amounts greater than $1,000 must automatically be rolled over into an IRA. Distributions of $1,000 or less can be distributed directly to the participant. Distributions are subject to federal withholding tax, and are subject to the 10% early withdrawal penalty if not rolled over. 

Cliff Vesting
A cliff vesting schedule vests 100% of employer contributions after a specified number of years of service. After three years of service, benefits must be fully vested.

CODA
A qualified profit sharing or stock bonus plan that gives a participant an option to take cash or to have the employer contribute the money to a qualified profit sharing plan as an "employer" contribution to the plan (i.e., an "elective deferral"). These arrangements are often referred to as “401(k) plans."

Control Group
Businesses that share common ownership. Depending on the percentage of ownership, companies under a controlled group (common control) must be treated as one company for retirement plan purposes. For a corporation, a controlling interest means ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, or at least 80 percent of the total value of shares of all classes of stock.

D

Deemed IRA Contributions
Voluntary employee contributions that are made to a qualified plan and designated by the employee to be treated as an IRA contribution. These contributions are permitted for plan years beginning on or after January 1, 2003, if the plan allows for them.

Defined Benefit Plan
Such plans define the benefits to be received at retirement. The employer determines, within IRS limits, the level of benefits, such as a fixed monthly payment or a certain percentage of compensation. Contributions are made annually to fund these benefits based on the benefit formula stated in the plan document.

Defined Contribution Plan
Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account.

Direct Rollover
A distribution to an employee made in the form of a direct trustee-to trustee transfer from a qualified retirement plan to an eligible retirement plan.

E

EACA
An Eligible Automatic Contribution Arrangement enables employers to unilaterally enroll employers in their 401(k) plans at a specified percentage of compensation and invest contributions in government approved default investment funds without fear of fiduciary liability, and without being subject to state garnishment law restrictions. The arrangement can allow for the 90-day opt out provision.

Elective Contributions
Also known as elective deferrals or 40(k) contributions. The amount of money the employee elects to contribute towards his/her 401(k) plan. As qualified elective contributions are tax deferred, the employer actually reduces the participant's income by the amount of the elective contribution. The accumulations and earnings in a 401(k) plan build on a tax deferred basis as well.

Eligibility
The determination of when an employee becomes a participant in the plan.

Entry Date
The date or dates specified in the Adoption Agreement at which a participant can begin receiving a contribution.

ESOP
An Employee Stock Ownership Plan is an employee benefit plan intended to motivate employees by giving them a stake in the firm's success through equity participation. Purchase of shares by employees is funded by a loan (usually from a bank) guaranteed by the employer. This plan costs little or nothing to the employer because the loan principal is paid off from the dividend payment to the employees, and the loan interest is a tax deductible expense.

F

Forfeiture
A loss of benefits under the plan, a vesting concept relates to the loss of a participants non-vested benefit when certain events occur.

G

Graded Vesting Schedule
A schedule used for vesting purposes, in which the vesting occurs over a period of five to 15 years. A six year graded vesting schedule, a common vesting schedule, is where vesting starts with the second year of service at 20% and the participant fully vests after the sixth year of service.

H

Hardship Withdrawal
A hardship withdrawal occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover a pressing financial need. You must qualify to withdraw by meeting the conditions your plan imposes in keeping with IRS guidelines. If you're younger than 59 1/2, you may have to pay a 10 percent penalty, plus income tax, on the amount you withdraw, and you may not be permitted to contribute to the plan again for a period of time.

I

In-Service Distribution
A withdrawal of vested money from a qualified plan to an employee who is still actively employed.

Integrated Profit Sharing Plan
A plan that takes into account either benefits or contributions made under Social Security.

IRA
Individual retirement accounts are self-directed investment accounts that provide the incentive of tax-deferred or tax-free earnings on assets in the account. If you earn income, or are married to someone who does, you can put up to $5,000 per year in an IRA in 2011. If you're 50 or over, you can invest an additional $1,000.

J

Joint & Survivor Annuity
An annuity payable at least annually for the life of the participant, with a survivor annuity payable for the life of the participants spouse following the participants' death.

L

Life Annuity
An annuity payable at least annually for the life of the participant, with no benefits payable after the participants’ death.

Lump Sum Distribution
A one-time payout of assets in an account, typically a retirement savings account. When you retire or change jobs, you can take a lump-sum distribution as cash, or you can roll over the distribution into an individual retirement account (IRA).

M

Mandatory Contributions
Employee contributions that are required as a condition of participation in the plan, or as a condition for receiving benefits or contributions under the plan.

Matching Contributions
Employer contributions that are made on account of elective contributions or employee contributions; also includes forfeitures that are allocated as matching contributions

Multiple Employer Plan
A single plan maintained by more than one unrelated employer.

N

New Comparability Formula
Also known as Class Allocated. New Comparability is a retirement plan design that allows business owners to allocate a more significant share of the tax qualified contributions to the accounts of select employees (such as owners or key employees) as compared to the other eligible employees.

NHCE
Employees who are not highly compensated. Generally, they are employees who earned less than $110,000 in 2011 (indexed for inflation). See highly compensated employees.

Non-elective contributions
Employer contributions (other than matching contributions) with respect to which the employee may not elect to have the contributions paid to the employee in cash or other benefits instead of being contributed to the plan.

Non-Highly Compensated Employee
Employees who are not highly compensated. Generally, they are employees who earned less than $110,000 in 2011 (indexed for inflation). See highly compensated employees.

Non-qualified Deferred Compensation Plan
An arrangement under which an employer provides deferred compensation to an eligible employee or allows independent contractors to defer compensation that would otherwise be currently payable for services rendered, but under a set of rules that makes them “non qualified” for purposes of the tax code.

P

Permitted Disparity
Method of computing and allocating non elective contributions under an employer sponsored plan, where the allocation method results in participants, with compensation above the integration level receiving a higher percentage of contribution .

Q

QACA
A Qualified Automatic Contribution Arrangement is an automatic contribution arrangement must provide a specified schedule of automatic contributions, an employer contribution, and notices to participants describing the plan provisions. The QACA satisfies the Safe Harbor rules and is deemed to pass most non-discrimination tests.

QDRO
A Qualified Domestic Relations Order is 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.

QJSA
Qualified Joint And Survivor Annuity. An annuity payment from a qualified plan or 403(b) account that provides a life annuity to the participant and a survivor annuity for the spouse after the participant’s death.

QMAC
Qualified Matching Contributions are matching contributions that are 100% vested at all times and that are subject to the same distribution restrictions as elective contributions.

QNEC
Qualified Non elective Contributions are a non-elective contributions that are 100% vested at all times and that are subject to the same restrictions of distribution as elective contribution.

R

Rollover
A distribution in which assets from one tax-deferred or tax-free investment to another.

Roth 401(k)
A 401(k) feature that allows employees to make elective contributions on an after-tax basis. Qualified distributions from these plans, including both the Roth contributions and their associated earnings, are distributed tax-free.

S

Safe Harbor Plan
Pre-approved IRS language using specifically-named events that are deemed to meet the IRS requirements for the issue employer is required to make contributions for each employee. The employer contributions in Safe Harbor 401k plans are immediately 100% vested.

Self Directed Brokerage Account
Allows you to select from thousands of publicly traded mutual funds in addition to your Plans’ core investment options.

SEP IRA
Simplified employee pension. A defined contribution plan in which employers make contributions to individual employee accounts (similar to IRAs). Employees do not contribute to the plan.

SIMPLE 401(k) Plan
Savings Incentive Match Plan for Employees. A type of defined contribution plan for employers with 100 or fewer employees in which the employer matches 100% of employee deferrals up to 3% of compensation or provides nonelective contributions up to 2% of compensation. These contributions are immediately and 100% 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.

SIMPLE IRA Plan
Savings Incentive Match Plan for Employees. A type of defined contribution plan for employers with 100 or fewer employees in which the employer matches 100% of employee deferrals up to 3% of compensation or provides nonelective contributions up to 2% of compensation. These contributions are immediately and 100% 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.

Summary of Material Modification (SMM)
A summary of amendments and changes made to the plan that is distributed to participants in the interim period until a new SPD is distributed.

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.

T

Tax-Sheltered Annuity Plan
Also known as a 403(b) plan or a tax-deferred annuity (TDA), is an employer sponsored retirement savings plan for employees of not-for-profit organizations, such as colleges, hospitals, foundations and cultural institutions.

Top Heavy Minimum
The top-heavy minimum benefit in a defined benefit plan must not be less than the employee’s average compensation multiplied by the lesser of 2% times the number of years of service, or 20%.

Top Heavy Plan
A plan in which 60% of account balances (both vested and non-vested) are held by certain highly compensated employees.

Top Paid Group
Employees who are among the highest paid 20% of all the employees of the employer. See Highly Compensated Employee.

V

Valuation Date
Refers to a point in time in which an asset is assigned a dollar value. It is a term often used in reference to valuation of assets to be distributed upon occurrence of an event, or a periodic determination of worth for reporting purposes.

Vesting Schedule
The structure for determining participants' right to company contributions that have accrued in their individual accounts. In a plan with immediate vesting, company contributions are fully vested as soon as they are deposited to a participant's account. Cliff vesting provides that company contributions will be fully vested only after a specific amount of time, and that employees who leave before this happens will not be entitled to any of the company contributions (with certain exceptions for death, disability or retirement). In plans with graded vesting, vesting occurs in specified increments.

Volume Submitter Plan
Documents that look like individually-designed documents and have been preapproved by the IRS.