Financial Terms

457 Plan Allows state and local government and tax exempt organizations to set up deferred compensation plans similar to a 401(k). This plan is not subject to ERISA. The funds belong to the employer, subject to the claims of the employer's general creditors.

Accrued Benefit A benefit earned by an employee through participation in a plan. In a defined contribution plan, it is the balance in the individual account at a particular time. For defined benefit plans, it generally refers to the benefit that will be provided when the participant reaches normal retirement age, as defined by the plan document.

Active Participants Eligible individuals who have hours of service and make contributions to a retirement plan.

Administration/Recordkeeping Fee Fee for providing recordkeeping and other plan participant administrative type services. For start-up or takeover plans, these fees typically include chargesfor contacting and processing information from the prior service provider and "matching up" or mapping participant information. Use of this term is not meant to identify any ERISA Section 3(16) (A) obligations.

Administrator/Plan Administrator The person or entity charged with the responsibility of administering the terms (provisions) of the plan.

Affiliated Service Group A group of two or more related organizations that are treated, for various employee benefit requirements, as a single employer under §414. Employees of these affiliates are treated as though they are employed by a single employer to determine plan qualification.

Age-Weighted Plan in which contributions are allocated to participants on a basis that considers both age and compensation.

Amendment Changes made to an existing plan.

Annual Audit Federal law requires that all ERISA-covered plans with more than 100 participants be audited by an independent auditor. It is also common to refer to a DOL or IRS examination of a plan audit.

Balance Inquiry Fee that may be charged each time a participant inquires about his or her balance.

Beneficiary / Beneficiaries The person(s) to whom a share of a deceased participant's account balance is payable.

Blackout A period of time during which participants are not allowed to make changes to their 401(k) balances. This generally occurs during a conversion to a new recordkeeper, or when significant changes are being made to the plan. The blackout gives the providers time to test and validate the new platform and/or provisions.

Break in Service / One-Year Break in Service The applicable computation period during which an employee has not completed more than 500 hours of service with the employer. Generally, no service credits or vesting accumulations occur during this period.

Brokerage Window A plan investment option allowing a participant to establish a self-directed brokerage account.

Cafeteria Plan A tax qualified arrangement under which participants may elect a combination of various taxable and tax-preferred forms of compensation, often including but not limited to cash, health insurance, 401(k) plan contributions, life insurance, child care, and additional vacation days. Also called a flexible benefit plan or Section 125 plan after the section of the tax code that allows for the creation of flexible benefit plans.

Carryover of Contribution Created whenever the employer's contribution for a given year exceeded the maximum allowable deductions for that year. Allows employers to make larger contributions in earlier, more profitable years.

Cash or Deferred Arrangement A qualified retirement plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf (i.e., they can take cash OR defer its receipt). These arrangements are sometimes referred to as 401(k) arrangements, after the section of the Internal Revenue Code that allows for-profit private companies to sponsor them. See also salary reduction plans.

Cash-Out Distribution.

Cliff Vesting Full (100%) vesting after a specified length of service (usually three years in Top Heavy Plans) with no vesting (0%) prior to that time.

Compensation The amount of a participant's taxable and nontaxable wages that is considered for purposes of a certain employee benefit requirement. This will include salary and bonus compensation, but it will not include distributions to “S” corporation shareholder employees.

Complete Discontinuance Complete plan termination and final distribution of plan assets.

Contract Termination Charge A charge to the plan for "surrendering" or "terminating" its insurance/annuity contract prior to the end of a stated time period. The charge typically decreases over time.

Contribution A payment made by an employee or employer to a qualified plan.

Conversion The process of changing from one service provider to another.

Cross-Tested A test for qualified plans with respect to the equivalent amount of benefits to determine that the plan does not discriminate in favor of highly compensated employees.

Custodial Account An account established for the safekeeping of plan assets, but with no discretion or responsibility for managing those assets.

Deduction Something that may be subtracted from taxable income.

Deferred Compensation The portion of the participant's total compensation which has been contributed to the plan.

Defined Benefit A defined benefit plan pays benefits based on a specific (defined) formula. The benefit is defined by the terms of the plan. In theory, what you "know" at a given point is the benefits due, based on that formula (though that may be easier said than done). Simplistically, it is what has traditionally been called a "pension" plan. The benefit is generally not expressed as a specific amount, but as a formula used to calculate that benefit. Typically, benefits paid will depend on three factors: age, service, and compensation. Benefits paid may be Social Security benefits, and may or may not be adjusted for subsequent cost-of-living adjustments, based on the terms of your plan. These plans consider years of service by the employee, generally providing greater benefits the longer an employee works for a particular employer.

Defined Contribution In a defined contribution plan, the amount of the contribution is defined by the plan rather than the benefit. In other words, you "know" how much goes into the plan (or at least the formula for determining it), not the benefits that may eventually be paid out. A defined contribution plan has individual accounts for each participant in the plan, another key difference from defined benefit plans. Also, both employer and/or employees may contribute to a DC plan (employee contributions to defined benefit plans are rare). These contributions are invested at the direction of the employer (as in most profit-sharing plans), the employee (as in 401(k) plans) or according to the plan itself (employee stock ownership plans, or ESOPs). The employee benefits directly from any investment gains in the individual account—or suffers from any investment loss. There is no "insurance" for these benefits, as there is with defined benefit DB plans.

Department of Labor The nontax (regulatory and administrative) provisions of ERISA are administered by the Department of Labor. The DOL issues opinion letters and other pronouncements, and requires certain information forms to be filed.

Determination Letter Letter issued by the IRS District Director's office determining that a plan submitted to it meets (or does not meet) the requirements for qualification.

Direct Transfer 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.

Disqualified,Disqualify Loss of qualified (tax-favored) status by a plan, generally resulting from operation of the plan in a manner that is contrary to the provisions of the plan or that discriminates against rank-and-file employees. A disqualified plan must disgorge its assets, creating tax consequences for both the sponsoring company and participants.

Disqualified Person A person who, because of his or her relationship with the plan (e.g., as a fiduciary, provider of services, or the plan sponsor) is prohibited from entering into certain transactions with the plan.

Distribution Expense The costs typically associated with processing paperwork and issuing a check for a distribution of plan assets to a participant. May include the generation of IRS Form 1099R. This fee may apply to hardship and other in-service withdrawals as well as to separationfrom- service or retirement distributions.

Diversification ERISA imposes a duty for fiduciaries to diversify plan investments to avoid the risk of losses—unless circumstances make it imprudent to diversify. This rule is aimed toward minimizing investment risks by investing in many different types of vehicles. Diversification is often referred to as "not putting all your eggs in one basket."

Early Distribution Penalty A 10% penalty assessed on distributions received from a qualified plan before certain conditions are met (generally before the participant attains age 59 1/2.

Early Retirement Provision made in a retirement plan to allow employees who have met certain conditions, such as length of service and specified age, to retire prior to their regularly scheduled retirement age. In general, in case of such early retirement, the benefits which a participant can expect to receive from the plan will be less than those offered at full retirement age.

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) A Federal law passed in 2001 that increased the contribution limits for Defined Contribution Plans and increased the maximum benefits available from a Defined Benefit Plan (by increasing the “415” limits).

Elective Deferral, Salary Reduction A contribution made to a 401(k) plan by the employer on an employee's behalf pursuant to the employee's cash-or-deferred election.

Eligibility Any employee who is eligible to become a participant in a plan pursuant to the terms of the plan document.

Employee Retirement Income Security Act of 1974 (ERISA) A federal law governing the management of employee benefit plans. The act's regulatory reach extends to most aspects of employee benefit trust administration.

Employee Stock Ownership Plan (ESOP) A profit-sharing, stock bonus or money purchase pension plan in which the plan assets must be invested primarily in stock of the employer (company stock). An ESOP may borrow from the employer, or use the employer's credit to acquire company stock (a leveraged ESOP).

Entry Date The date on which an employee joins the plan.

Excess Contribution The excess of the elective contributions made to a 401(k) plan on behalf of highly compensated employees (HCEs) for the plan year in excess of the maximum allowed under the ADP test.

Excess Deferral An employee's elective contributions for the taxable year in excess of the current deferral limit (Increasing with EGTRRA, $14,000 in 2005).

Expense Ratio The cost of investing and administering assets, including management fees, in a mutual fund or other collective fund expressed as a percentage of total assets.

Fiduciary An obligation of a person or trust institution to act in the best interests of the client on issues within the scope of their relationship.

Fiduciary Duty/Fiduciary Duties Responsibility to act with loyalty and prudence, to diversify plan assets, and act in accordance with plan documents.

Flexible Benefit Plan A qualified arrangement under which participants may elect a combination of various taxable and tax-preferred forms of compensation, often including but not limited to cash, health insurance, 401(k) plan contributions, life insurance, child care, and additional vacation days. Also called a cafeteria plan.

Flexible Spending Account A type of flexible benefit plan that allows employees to set money aside on a pretax basis for qualified unreimbursed medical or dependent care expenses. These accounts may exist either within a full flexible benefit plan or separately as a stand-alone plan. They can be funded by salary reduction arrangements, employer contributions, or both. Employees must determine how much they wish to contribute to the account in advance and forfeit any unused dollars at the end of the year.

Forfeit, Forfeiture The benefits that a participant loses if he or she terminates employment before becoming eligible for full retirement benefits under the plan. The difference between total benefit and total vested benefit. For example, a participant who leaves employment when 60% vested will lose the remaining 40%.

Form 5500 Form which must be filed with the IRS for each year in which a qualified plan has assets. Form 5500 is filed for plans with 100 or more participants, Form 5500 C or R for those plans with less than 100 participants, and Form 5500 EZ for qualified plans with less than 2 participants. Plans that qualify for Form 5500 C/R must file 5500 Form C for the first year, and every three years thereafter. In intervening years those plans may file Form 5500-R.

Front-EndLoad Sales charges incurred when an investment in a mutual fund is made.

Frozen Plan A qualified plan that continues to exist even though employer contributions have been discontinued and benefits are no longer accrued by participants.

Graduated Vesting A vesting schedule that provides for increasing levels of vesting with increasing length of service, until full vesting is achieved. (See vesting.)

Highly Compensated Employee (HCE) An employee who, during the year or the preceding year, is (or was) (1) a 5% owner or (2) receiving compensation in excess of $100,000 (adjusted for cost-of-living increases) and was a member of the top-paid group of employees (if elected by the employer).

HR-10, HR10, Keogh A qualified retirement plan that covers a self-employed person (though other employees might also be covered). May include either a defined contribution or a defined benefit plan.

Incidental (Benefit) Any benefit of a retirement plan which is not specifically spelled out in the plan as a primary retirement benefit; also referred to as a fringe benefit. Special rules apply to these benefits to prevent discrimination with regard to incidental benefits. Life insurance coverage is a common incidental benefit.

Individually Designed Plan An individually designed (or custom-designed) retirement plan is tailored to meet particular needs. It is based on a legal document drafted specifically to conform with the employer pecifications, unlike a prototype plan that only allows for customization within a fixed set of choices.

Individually Managed Account An investment account managed for a single plan.

Individual Retirement Arrangement (IRA) An IRA is a nonforfeitable trust or custodial account established for the exclusive benefit of an individual and the individual's beneficiaries. The trustee (or custodian) must be a bank, thrift institution, insurance company, brokerage firm, or other person who demonstrates to the IRS that such person will administer the account in a manner consistent with the requirements of the law. No part of the funds may be invested in life insurance contracts. Assets of the account cannot be commingled with other property except if there is a common trust fund or common investment fund.

In-Service Distribution Distribution of retirement benefits received to a plan participant prior to retirement (and, generally, while still employed). Most in-service distributions received before age 59-1/2 will incur an additional 10% tax that applies to distributions from qualified plans, taxsheltered annuities, and individual retirement accounts.

Installation Fee One-time fee for initiating a new plan or initiating new services.

Integration A feature of some qualified retirement plans that coordinates plan benefits or contributions with Social Security. Social Security benefits are progressive, i.e., they replace a greater proportion of pre-retirement earnings for lower earners than for higher earners. To compensate for this benefit tilt, plans may provide proportionately (as a percentage of compensation) higher pension benefits or contributions to higher-paid participants than to lowerpaid participants, subject to certain limits. Since the Tax Reform Act of 1986 (TRA 86), integration is referred to as permitted disparity.

Investment Adviser Individual or entity who provides investment advice for a fee. Registered Investment Advisers must register with the SEC and abide by the rules of the Investment Advisers Act.

Investment Manager Individual who is responsible for the selection and allocation of investment securities.

Investment Policy Statement A formal statement outlining the broad investment objectives of a plan.

Investment Transfer Expense Fee associated with a participant changing his or her investment allocation, or making transfers among funding accounts under the plan.

IRC, Code, Internal Revenue Code Internal Revenue Code of 1986 The basic Federal tax law.

Loan If the plan allows, a participant may take a loan from the plan, using the vested account balance as collateral. These loans may allow a participant to repay the account with a stipulated interest rate, or repayments may be credited to the general assets of the plan. Qualified loans normally provide favorable interest rates for participants (prime + a percent or two), but have many restrictions regarding size and amortization which prevent the loan proceeds from being considered as current income or as an in-service withdrawal.

Loan Maintenance and Repayment Tracking Fee Fee charged to monitor outstanding loans and repayment schedule.

Loan Origination Fee Fee charged when a plan loan is originally taken.

Loan Processing Fee Fee charged to process a plan loan application.

Lump-Sum Distribution Distribution from a qualified retirement plan of a participant's vested balance within one taxable year. To be considered a qualified lump-sum distribution, it must be made because of the employee's death, attainment of age 59-1/2, separation from service, or disability (if self-employed).

Management Fee Fee charged for the management of pooled investments such as collective investment funds, insurance/annuity products, mutual funds and individually managed accounts.

Master Plan A retirement plan sponsored by a financial institution such as an insurance company, bank, mutual fund, or stock brokerage firm, that may be adopted by an employer by executing ("adopting") a participation agreement.

Minimum Additional Investment Minimum incremental capital allocation allowed to an existing investor.

Minimum Benefit (Under Top-Heavy Plan) Under a top-heavy defined benefit plan, the annual requirement benefit of a non-key employee must be not less than 2% of compensation. In a defined contribution plan the minimum contribution is 3% of the non-key employee's current year salary.

Minimum Coverage Minimum number of employees that must be covered by a plan before it can be tax-qualified. Plan must satisfy either the ratio percentage test or the average benefit test. These tests are found in Section 410 of the IRC.

Minimum Funding Minimum amount that must be contributed by an employer that has a defined benefit, money purchase, or target benefit pension plan. If the employer fails to meet these minimum standards, in the absence of a waiver from the IRS, an excise tax will be imposed on the amount of the deficiency.

Minimum Participation Must be met by employer in order for the plan to be qualified; plan must benefit at least the lesser of (1) 50 employees, (2) 40% of all employees, or (3) if only two employees, both employees. Minimum participation requirements cannot be satisfied by combining plans of an employer.

Money Purchase A defined contribution plan under which the employer's contributions are mandatory and are usually based on each participant's compensation. Retirement benefits under the plan are based on the amount in the participant's individual account at retirement. These plans used to be required with a Profit Sharing plan to maximize benefits in a defined contribution plan. After EGTRRA, maximum benefits can be achieved with just a Profit Sharing plan; reducing administration costs and giving employees greater flexibility.

Mortality Rates based on life expectancy formulas used by defined benefit actuaries to determine funding requirements based on the formulas in the plan and the demographics of the plan participants.

Multi-Employer Plan A pension plan, maintained under a collective bargaining agreement, that covers the employees of more than one employer. Generally, the various employers are not financially related but rather are engaged in the same industry.

Multiple Employer Plan A qualified retirement plan to which more than one employer contributes and that is not the subject of a collective bargaining agreement.

Named fiduciary A fiduciary named in the plan instrument or identified through a procedure set forth in the plan. The named fiduciary has authority to designate others to carry out fiduciary responsibilities.

Nondeductible Unable to be deducted for tax purposes; nondeductible contributions are defined as the sum of (1) amounts contributed by an employer to a qualified retirement plan for a taxable year in excess of the amount allowable as a deduction for that taxable year, and (2) the unapplied amounts from the preceding taxable year.

Nondiscrimination A retirement plan is a qualified plan only if the contributions or benefits provided under the plan do not discriminate in favor of highly compensated employees. Three requirements must be met: (1) contributions or benefits provided in the plan must be nondiscriminatory in amount; (2) benefits, rights, and features provided under the plan must be available to participants in a nondiscriminatory manner; and (3) the effect of plan amendments and of plan terminations must be nondiscriminatory.

Nonelective Contributions A contribution to a cash-or-deferred arrangement (CODA) other than an elective deferral. The latter is a contribution that the employee could have elected to receive as cash, but instead elected to defer receipt.

Nonforfeitable Benefits Benefits that cannot be lost by a participant—"vested" benefits.

Non-Highly Compensated Employee (NHCE) Any employee (either active or former) who does not fall under the definition of a highly compensated employee.

Nonperiodic Distributions Most nonperiodic distributions fall into three main categories: lump sum distributions, eligible rollovers, and loans from retirement plans. Nonperiodic distributions normally require withholding tax unless the distribution is transferred by a direct rollover to an eligible retirement plan that permits the acceptance of rollover distributions.

Nonqualified Plan Retirement plan that does not fall within the IRS and ERISA guidelines established for a plan to be qualified for tax purposes.

Nonresident Alien Non-U.S. citizen who resides outside the United States; in some cases, inclusion of nonresident aliens in a qualified plan can cause a plan to lose its tax-qualified status.

Normal Retirement Age Established by the individual plan, though most plans specify age 65 as the normal retirement age.

Notice to Interested Parties Notice given to all parties in interest regarding legal or administrative issues about which all parties in interest are required by the IRS and the DOL to have disclosure.

Notification Letter IRS option letter which alerts retirement plans, plan sponsors, and plan administrators of potential issues that might cause a plan to lose its tax-qualified status.

Opinion Letter Interpretive letter issued by the U.S. Department of Labor that addresses specific issues and clarifies DOL guidelines.

Optional Forms of Benefit Distribution alternative that is available under a qualified retirement plan. Variances in optional forms of benefit may result from differences in payment schedule, timing, commencement, medium of distribution, election rights, or the portion of the benefit to which the distribution alternative applies.

Partial Termination Reducing benefits or making participation requirements less liberal, although not amounting to a complete termination of the plan, may be considered a partial termination, resulting in the vesting of accrued benefits for at least part of the plan.

Participant An employee who meets the participation requirements for the plan and who is enrolled in the plan.

Participant Education Materials/Distribution Expenses All costs (including travel expenses) associated with providing print, video, software and/or live instruction to educate employees about how the plan works, the plan investment funds, and asset allocation strategies. There may be a one-time cost associated with implementing a new plan, as well as ongoing costs for an existing program.

Participation Taking part in a retirement plan. Most plans have participation requirements thatspecify which employees are eligible to participate in the plan. Reaching age 21 and a year of service with the employer are common participation requirements.

Party in Interest A party that, because of his, her, or its special relationship with the plan (e.g.,as a fiduciary, provider of services, or the plan sponsor), is prohibited from entering into certain transactions with the plan.

Pension Benefit Guaranty Corporation (PBGC) A nonprofit corporation, functioning under the jurisdiction of the Department of Labor, that is responsible for insuring pension benefits.

Pension Plan A defined benefit plan that provides a definitely determinable annual benefit based on a formula contained in the plan document.

Periodic Distributions Recurring payments such as an annuity that qualify for elective withholding but do not fall under the automatic withholding rules.

Permanent Qualified plans must be established with the intent of being permanent. Plans can be amended or terminated, but the plan sponsor must prove to the IRS that the retirement plan is for the long-term benefit of its participants. In general, plans that have been in existence for less than 5 years when terminated are more likely to be challenged than plans that have been in existence for more than 5 years.

Plan Retirement vehicle by which an employer intends to provide long-term benefits for its employees. Plans can be either defined benefit plans or defined contribution plans. In addition, plans either can be qualified or nonqualified for tax purposes.

Plan Assets Assets held by the retirement plan for the benefit of the participants. Plan assets are to be segregated from the employer's property and held in trust by a trustee or investment manager who has the fiduciary duties of (1) composing the portfolio with regard to diversification, (2) structuring the assets so that the liquidity and current return of the portfolio are relative to the anticipated cash flow requirements of the plan, and (3) managing the assets so that the projected return of the portfolio is relative to the funding objectives of the plan.

Plan Document The document that specifies the plan or instrument, including all amendments.

Plan Document/Determination Letter Fee (Filing Fee) Fee charged for a written plan document. Fee can also include the costs associated with preparing and filing IRS required documentation, including the request for a determination letter (document issued by the IRS stating whether the plan meets the qualifications for tax-advantaged treatment).

Plan Year The 12 calendar months ending with the last day of the month specified by the employer in the Adoption Agreement, or plan document.

Product Termination Fee Investment-product charges associated with terminating one or all of a service provider's investment products.

Profit-Sharing Plan A plan or program for sharing company profits with the firm's employees. Under ERISA and the IRC, profit-sharing plans are treated as defined contribution or individual account plans. As such, an employer is under no financial obligation to provide a specific dollar amount at retirement in these plans.

Prohibited Transaction ERISA prohibits a fiduciary from causing a plan to enter directly or indirectly into transactions, with certain persons defined as "parties-in-interest" as either buyer or seller, that would constitute a (1) sale or exchange, or leasing of any property between the plan and a party-in-interest; (2) lending of money or other extension of credit between the plan and a party-in-interest, (3) furnishing of goods, services, or facilities between the plan and a party-ininterest; (4) transfer to or use by or for the benefit of a party-in-interest of any assets of the plan; or (5) the acquisition, on behalf of the plan, of any employer security or employer real property not otherwise specifically exempted by law or regulation.

Prototype Plan A retirement plan, sponsored by a financial institution such as an insurance company, bank, mutual fund, or stock brokerage firm, that may be adopted by an employer by executing (adopting) a participation agreement.

Prudent Man Requires that a plan fiduciary use the "care, skill and diligence" that would be used by a reasonably prudent person familiar with "such matters." While essentially an extension of the common-law requirement of good faith in handling other people's money, it creates a "prudent expert" test that places an additional burden on the plan sponsor—to know what a person in this position of responsibility should know, rather than a reliance on the knowledge level of the general populace.

Qualified A plan that is entitled to the tax benefits and protections of the Employee Retirement Income Security Act (ERISA). In order to be "qualified", a plan must: (1) have a written plan document, (2) be permanent, (3) communicate the provisions of the plan to eligible employees,(4) be established and operated for the exclusive benefit of plan participants or their beneficiaries, (5) have minimum participation (eligibility) standards, (6) be nondiscriminatory in coverage and contributions/benefits and (7) have minimum vesting standards. For the plan assets to be eligible for tax benefits, the Internal Revenue Code (IRC) also requires that the plan: (1) meet minimum participation, vesting and funding standards, and plan assets must be legally segregated from other assets of the sponsor, (2) must not benefit only a limited number of favored employees but must benefit employees in general in such a way as to be deemed nondiscriminatory by the IRS and (3) must provide definitely determinable benefits.

Qualified Domestic Relations Order (QDRO) A domestic relations order that creates or recognizes the existence of an alternate payee's right or assigns an alternate payee the right to receive all or a portion of the benefits payable with respect to a participant under a qualified retirement plan, and that complies with certain special requirements. Only a spouse, former spouse, or dependent can be the alternate payee.

Qualified Joint and Survivor Annuity (QJSA) An immediate noncashable and nontransferable annuity for the life of the participant, with a survivor annuity for the life of the participant's spouse. The amount of the survivor annuity cannot be less than 50% or more than 100% of the amount of the annuity payable during the joint lives of the participant and participant's spouse.

Qualified Matching Contribution (QMAC) An employer may make qualified matching contributions to the plan. The amount of such qualified matching contributions shall be calculated by reference to the participant's elective deferrals as specified in the plan document. Qualified matching contributions are nonforfeitable when made, and distributable only as defined in the plan document.

Qualified Nonelective Employer Contribution (QNEC) An employer may make special qualified nonelective contributions on behalf of non-highly compensated employees sufficient to satisfy either the ADP test or the ACP test, or both, pursuant to regulations under the Code. Allocations of qualified nonelective contributions to each non-highly compensated employee's account shall be made in accordance with the plan document.

Qualifying Employer Securities Stock, marketable obligations or certain publicly traded partnership interests issued by an employer of employees covered by a plan of the employer or an affiliate.

Redemption Notice Period Required notification period of an intended redemption request.Notification is usually required in writing.

Required Beginning Date Generally refers to the date on which distributions from a plan (or IRA) must begin—the first day of April of the calendar year following the calendar year in which the participant attains age 70 1/2.

Required Minimum Distribution, 401(a)(9) The minimum amount that must be paid each year to an employee, beginning with the required beginning date. Simplistically, the calculation of this amount is distributed based on actuarial tables. If not distributed on a timely basis, or in the correct amounts, the employee is assessed a penalty of 50% of the amount which should have been distributed.

Retirement Equity Act of 1984 (REA) The major changes of this legislation included an expansion of the survivor-benefit requirements, allowed the assignment/alienation of benefits in a divorce proceeding (via a QDRO), and reduced the age requirement for plan participation.

Reversion of Contribution The return of an employer contribution made based on a mistake of fact, or which would impact the plan's qualification or the contribution's deductibility. Rollover A tax-free distribution from one retirement account to another, including individual retirement accounts.

Safe Harbor Employees are permitted to make pre-tax elective deferrals of their compensation under the terms of a qualified 401(k) Plan. Recognizing that Highly Compensated Employees ("HCEs") would have the means to defer larger amounts than Nonhighly Compensated Employees ("NHCEs"), Congress devised an antidiscrimination test. Under the test, the average deferral percentage ("ADP") of all eligible NHCEs is compared to the average deferral percentage of HCEs. The test is satisfied if the spread in the two percentages does not exceed the limits specified by statute and the regulations. Testing rules have frequently had the effect of limiting the amount of elective salary deferrals, which may be made by an employer’s Highly Compensated Employees. The testing is an administrative and financial burden to sponsoring employers. There has been a change in the law so those employers may make prescribed "safe harbor" contributions in order to avoid the onerous burden of testing.

The Small Business Job Protection Act of 1996 (SBJPA) A Federal law allowing 401(k) Plans to eliminate antidiscrimination testing, effective for plan years beginning after December 31, 1998. The safe harbor for the ADP test is eliminated by use of one of two employer safe harbor contributions formulas.

Savings Incentive Match Plan for Employees (SIMPLE) A simplified retirement plan,structured either as a 401(k) or as an IRA, that allows employees to make elective contributions, while requiring certain matching or nonelective contributions from the sponsoring employer. The specified rate of employer contributions makes necessary the requirement to perform the ADP/ACP nondiscrimination tests. An employer sponsoring a SIMPLE plan may not sponsor a qualified retirement plan while the SIMPLE plan is active.

Self-Directed An account in which the individual participant has elected to make all investment decisions. Generally speaking, this terminology applies to any 401(k)-type arrangement where participants direct their account investments. More specifically, "self-directed brokerage accounts" are available in a growing number of 401(k) plans where a participant actually places trades directly through a broker designated by the program, permitting investment in a wider variety of securities, including individual stocks.

Self-Employed An individual who has earned income for the taxable year, or an individual who would have had earned income but for the fact that the trade or business had no net profits for the taxable year. The self-employed individuals Tax Retirement Act of 1962 established the framework by which unincorporated small business owners and partners could set up and participate in tax-qualified pension plans popularly referred to as HR-10 (for an early version of the bill) or Keogh plans (for U.S. Rep. Eugene Keogh, sponsor of the bill). In order to be eligible to establish a Keogh plan, an unincorporated sole proprietorship or partnership must be engaged in a business with a profit motive. Both owners/partners and their self-employed common-law employees are eligible to participate. For Keogh plan purposes, a common-law employee is one for whom an employer has the right to control and direct the results of the work and how it is done. Individuals that generate only passive income (a common example is real estate holdings) are not eligible to sponsor a Keogh plan with the passive income. A Keogh plan can be a profit sharing or defined benefit plan.

Service Provider Termination Charge Plan administrative costs associated with terminating a relationship with a service provider, with the permanent termination of a plan, or with the termination of specific plan services. These may be termed "surrender" or "transfer" charges.

Separation from Service A person is separated from service when he does not receive compensation from his former employer. This typically occurs in termination or a willful separation of service.

Signature Ready Form 5500 Fee to prepare Form 5500, a form which all qualified retirement plans (excluding SEPs and SIMPLE IRAs) must file annually with the IRS.

Simplified Employee Pension (SEP) An individual retirement account arrangement for covered employees, subject to specific rules on contribution and eligibility. First authorized in 1979, SEPs simplify the administration and reduce the paperwork associated with many other types of pension plans. For this reason, they are especially attractive to smaller employers. A SEP is not a qualified retirement plan, but a type of IRA.

Social Security Integration Profit sharing allocation method that allows the sponsor to integrate profit sharing contributions with Social Security benefits. This method of allocation permits employers to make a larger percentage of wage profit sharing payments for higher income earners.

Spousal Consent A spouse's written consent for the participant-spouse to designate some other beneficiary or joint beneficiary arrangement.

Start-up/Enrollment Expense Costs associated with providing materials to educate employees about the plan, and enrolling employees in the plan. This may be part of, or included in, the education programs. There may be a one-time cost associated with implementing a new plan, as well as ongoing enrollment costs.

Stock Bonus A defined contribution plan similar to a profit-sharing plan, except that the employer's contributions do not have to be made out of profits and benefit payments generally must be made in employer stock.

Summary Annual Report Must be distributed to plan participants within the later of nine months after the close of the plan year or two months after the end of an IRS-granted extension to file the Form 5500 or 5500-C/R. It must contain certain financial and other information in the manner set forth in Labor Reg. Section 2520.104b-10(c)(3).

Summary Plan Description (SPD) A simplified but comprehensive description of the plan provisions and ERISA-related material that must be provided to participants and beneficiaries, as well as the Department of Labor. Courts have held that, when the SPD and plan document are in conflict, the SPD controls. The SPD must be revised every five years if there are material modifications—and every 10 years even if not. New plans are to have an SPD available 120 days after the plan's effective date (or date of plan adoption, whichever is later). New participants should receive an SPD within 90 days of eligibility.

Suspension (of Benefits) Benefits are no longer received. This can occur in a variety of situations including death.

Taxable Wage Base With respect to any year, the maximum amount of earnings which may be considered wages under Section 3121(a)(1) of the internal Revenue Code. For 2005, the maximum amount is $210,000. Compensation in excess of this amount is disregarded.

Tax-Deferred Annuity, Tax-Sheltered Annuity Also known as 403(b) annuities. This is the mechanism for employees of certain not-for-profit organizations to elect to defer compensation in a qualified retirement plan.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) This legislation lowered limits on contributions and benefits for corporate plans; outlined situations where certain loans from a plan could be treated as distributions; and added "top-heavy" plan requirements. It also introduced the notion of voluntary withholding of taxes on distributions from qualified plans.

Termination A person who has been a participant, but whose employment has been terminated other than by death, total and permanent disability or retirement.

Third-Party Administrator (TPA) Specialized plan administration firms that generally act as an extension of the plan sponsor's duties.

Top-Heavy A plan that primarily benefits key employees, generally when the value of accrued benefits for "key" employees is more than 60% of the value of total accrued benefits for the plan. If a plan is found to be top-heavy, special remedies must be applied, including:

     • The benefit accrual for nonkey employees under a defined benefit plan must be at least 2% of pay for up to 10 years.

     • The contributions made for nonkey employees under a defined contribution plan must be at least 3% of pay.

     • Special and more rapid vesting requirements will apply.

Top-Paid Group (As Used in HCE Definition) Generally, the top 20% of employees who performed services for the employer during the applicable year, ranked according to the amount of "415 Compensation" received from the employer during such year.

Trustee The individual/institution holding legal title to the trust property. The person or entity named in the trust document and any successors in interest with fiduciary responsibilities as named in the trust document.

Trustee Services Fee charged by the individual, bank or trust company with fiduciary responsibilities for holding plan assets.

Vesting,Vested, Vesting Schedule Generally, the nonforfeitable portion of any account maintained on behalf of a participant. Upon satisfying the participation requirements, further conditions must be met for the participant to become entitled to receive a benefit—that is, to have a vested right to the benefits.

Voluntary / Employee Contribution A provision for voluntary employee contributions is an optional feature included in some thrift plans. This provision provides a means for the employee to make contributions to the plan on an "after-tax" basis, while allowing earnings on those contributions to accumulate on a tax-deferred basis. Voluntary employee contributions normally are accounted for separately.

Withholding The process of taking money out of a taxable distribution as a prepayment of income taxes due on the event.

Wrap Fee An inclusive fee generally based on the percentage of assets in an investment program, which typically provides asset allocation, execution of transactions and other administrative services.

Year of Service (Generally) The computation period of 12 consecutive months during which an employee has completed at least 1,000 hours of service.

 

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