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Glossary of Terms

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401(k) Plan
A defined contribution plan that permits employees to have a portion of their salary deducted from their paycheck and contributed to an account. Federal (and sometimes state) taxes on the employee contributions and investment earnings are deferred until the participant receives a distribution from the plan (typically at retirement). Employers may also make contributions to a participant's account.

403(b) Plan
See Tax Sheltered Annuity (TSA).

Average Deferral Percentage (ADP)
An anti-discrimination test for a 401(k) plan that compares the average salary deferral rate of highly compensated employees to that of non-highly compensated employees.

Average Contribution Percentage (ACP)
An anti-discrimination test for a 401(k) plan that compares the average rate of matching contributions provided to highly compensated employees to that provided to non-highly compensated employees.

The process of determining (allocating) an employee’s share of an employer's overall contribution made to a defined contribution plan. Established by a formula in the plan.

Alternate Payee
A person other than a plan participant (such as a spouse, former spouse, child, etc.) who, under a domestic relations order, has a right to receive all or some of a participant's pension benefits.

Annual Audit
An independent audit required by federal law for all plans with, generally speaking, more than 100 participants. It is also common to refer to a DOL or IRS examination of a plan as a plan audit.

A contract providing a series of payments, usually based upon life expectancy, at regular intervals. See also Qualified Joint and Survivor Annuity.

Automatic Enrollment
The practice of enrolling all eligible employees in a 401(k) plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make contributions to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.

A person, persons or trust designated to receive the plan benefits of a plan participant in the event of the participant's death.

Cafeteria Plan
A health or welfare benefit plan offering a choice from a "menu" of cash or two or more benefits.

The distribution of assets from a qualified plan to a participant prior to retirement, or age 59 1/2 typically occurring when a participant has a balance under $1,000 and leaves a company without requesting to have their assets rolled over into an IRA or into a new employer's plan. Cash-outs are subject to federal withholding tax, and are subject to the 10% early withdrawal penalty if not rolled over.

Cash or Deferred Arrangement (CODA)
A type of profit sharing or stock bonus plan in which employees may defer current compensation on a pre-tax basis, e.g. 401(k) and 403(b) plans.

Cash or Deferred Election
A participant request to defer compensation, on a pre-tax basis to a CODA plan.

Common Control
Business are under common control when one entity owns at least 80% of the stock, profit, or capital interest in other organization, or when the same five or fewer people own a controlling interest in each entity.

The process of changing from one service provider to another.

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An employee’s before-tax contribution to a 401(k) or 403(b) plan.

Defined Benefit Plan
A retirement plan in which the benefit payable to participants at retirement is specified, based on a pre-determined formula, independent of investment returns and guaranteed by the employer. The “benefit” is defined by the plan, not the
contribution amount.

Defined Contribution Plan
A retirement plan in which contributions are made to individual participant accounts, and the final benefit consists of the accumulated value of contributions plus investment performance. The “contribution” is defined by the plan, not the benefit amount.

Department of Labor (DOL)
The U.S. Department of Labor (DOL) one of the principle regulators of pension and benefit plans. Through its branch agency EBSA, the DOL is responsible for administering the provisions of Title I of ERISA.

Determination Letter
A letter issued by the IRS formally recognizing that the plan’s document (plan & trust) meets the qualifications for tax-advantaged treatment.

Discrimination Testing
Mathematical measurements used to determine if tax qualified retirement plans are in compliance with several regulations.

Payout made from a retirement plan, except for a loan disbursement. See also Lump Sum Distribution and Annuity.

Early Withdrawal Penalty
A 10% penalty tax for withdrawal of assets from a qualified retirement plan prior to age 59 1/2, death, disability, or retirement. This 10% penalty tax is in addition to regular federal and (if applicable) state tax.

Elective Contribution
An employee’s before-tax contribution to a 401(k) or 403(b) plan. See Deferral.

Conditions that must be met in order to participate in a plan, such as age or service requirements.

Eligible Employees
Employees who meet the requirements for participation in an employer-sponsored plan.

Employee Benefits Security Administration (EBSA)
An agency of the Department of Labor responsible for protecting the integrity of retirement plans, health plans and other employee benefits.

A federal law that sets the legal standards which must be met by a plan, it’s sponsor, fiduciaries and service providers in order to retain its tax-advantaged status.

ERISA Rights Statement
A statement required by ERISA that explains participant and beneficiary rights and must be included within a summary plan description (SDP).

ESOP (employee stock ownership plan)
A qualified defined contribution plan in which plan assets are invested primarily or exclusively in the securities of the sponsoring employer.

Excess Aggregate Contributions
After-tax participant contributions or matching employer contributions that cause a plan to fail the 401(m) actual contribution percentage (ACP) non-discrimination test.

Excess Benefit Plan
A plan or part of a plan, not qualifying for full tax-advantaged status and maintained to provide benefits that exceed IRS Code 415 limits on contributions and benefits for full tax-advantaged plans.

Excess Contributions
Pre-tax participant contributions that cause a plan to fail the 401(k) actual deferral percentage (ADP) non-discrimination test.

Expense Ratio
The percentage of a fund's assets that are used to pay its annual expenses.

Fidelity Bond
A bond that protects participants in the event a fiduciary or other responsible person steals or mishandles plan assets.

A person with the authority to make decisions regarding a plan's assets or important administrative matters. Fiduciaries are required under ERISA to make decisions based solely on the best interests of plan participants. A fiduciary may be named as such, or may become such solely by virtue of their actions (i.e. one might become a fiduciary by their actions, even if unintentional).

Fiduciary Insurance
Insurance that protects plan fiduciaries in the event that they are found liable for a breach of fiduciary responsibility.

Plan assets surrendered by participants upon termination of employment before being fully vested in the plan. Forfeitures may be distributed to the other participants in the plan or used to offset employer contribution.

Form 1099R
A form sent to the recipient of a plan distribution and filed with the IRS listing the amount of the distribution.

Form 5500
A form which all qualified retirement plans (excluding SEPs and SIMPLE IRAs) must file annually with the IRS, somewhat similar to a tax return.

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Guaranteed Investment Contracts (GICs)
Accounts with an insurance company at a fixed rate of interest.

Hardship Distribution
A participant's withdrawal of their plan contributions prior to severance of employment and conditioned on the presence of financial hardship. These distributions are generally taxable as early distributions and are subject to a 10% penalty tax if the participant is under age 59 1/2. (Roth 401(k)s have different rules.)

Highly Compensated Employees (HCEs)
An HCE, according to the Small Business Job Protection Act of 1996, is an employee who received more than $100,000 in compensation (indexed annually) during the last plan year OR is a 5% owner in the company.

Individual Retirement Account (IRA)
Personal retirement vehicles that allows a person to make annual tax deductible or non-deductible contributions. These accounts must meet IRS Code 408 requirements, but are created and funded at the discretion of the individual. They are not employer sponsored plans.

In-Service Distribution
A participant's withdrawal of their plan contributions prior to severance of employment, if provided for in the pan features. These distributions are taxable as early distributions and are subject to a 10% penalty tax if the participant is under age 59 1/2. (Roth 401(k)s have different rules.)

Internal Revenue Service (IRS)
The branch of the U.S. Treasury Department is principally responsible for administering the tax requirements of qualified pension plans and other retirement vehicles.

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Keogh Plan
A qualified defined contribution plans maintained by self-employed individual(s), otherwise virtually identical to the same plan maintained by a corporate entity.

A plan arrangement that includes both 401(k) contributions and an ESOP.

Leased Employee
An individual employed by a leasing organization, yet who performs services for another company substantially as if they were employed by that other company.

Lump-Sum Distribution
The distribution of a participant’s entire account balance within one calendar year.

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Matching Contribution
A contribution made by the company to the account of the participant in ratio to contributions made by the participant.

Material Modification
A change in the terms of the plan that may affect plan participants, or other significant changes in a summary plan document (SDP).

Money-Purchase Plan
A type of defined contribution plan in which the employer's contributions are determined by a specific formula, usually as a percentage of pay. Contributions are not dependent on company profits.

Multiemployer Plan
A pension plan receiving contributions from more than one employer contributes, and which usually is maintained according to collective bargaining (union) agreements.

Mutual Fund
A single account designed to create a portfolio of individual investments that may help to reduce the risk of owning individual investments.

Named Fiduciary
One or more named individuals who have been specifically named and authorized to exercise control over the plan or its assets.

Non-elective Contribution
An employer contribution to a 401(k) or similar plan, that is not related to employee contributions, e.g. “profit sharing” contributions. This type of contribution is neither a matching contribution nor an elective contribution.

Non-Highly Compensated Employees (NHCEs)
Employees who are not highly compensated. Generally, they are employees who earned less than $105,000 in 2008 (indexed for inflation). See Highly Compensated Employees.

Non-Qualified Deferred Compensation Plan
A plan subject to tax to which the assets of certain employees (usually Highly Compensated Employees) are contributed at “arm’s length” so as to be taxed at the employer level but not the employee level. These funds remain “corporate assets” and may be reached by an employer's creditors.

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Participant Directed Accounts
Investment options offered to participants that allow them to choose their own investment mix, utilizing the investment alternatives designated by the plan fiduciaries.

Any individual or group having direct interest in the plan including: the employer; the directors, officers, employees or owners of the employer; any employee organization whose members are plan participants; plan fiduciaries; and plan service providers.

Pension Benefit Guaranty Corporation (PBGC)
A federal agency established by Title IV of ERISA for the insurance of defined benefit pension plans. The PBGC provides payment of limited pension benefits if a plan terminates and is unable to cover all required benefits.

Plan Administrator
The individual, group or corporation named in the plan document as most responsible for the operation of the plan. The plan sponsor is generally the plan administer if no other entity is named.

Plan Loan
Loan from a participant's accumulated plan assets, not to exceed 50% of the balance or $50,000, whichever is less. Loans are an optional plan feature.

Plan Sponsor
The entity responsible for establishing and maintaining the plan, almost always the employer.

Plan Year
The calendar, policy or fiscal year for which plan records are maintained.

Prohibited Transaction
A category of activity regarding plan assets that is prohibited by ERISA. These activities include transactions with a party-in-interest, including, sale, exchange, lease, or loan of plan securities or other properties. Any treatment of plan assets by the fiduciary that is not consistent with the best interests of the plan participants is a prohibited transaction

Profit Sharing Plan
A company-sponsored plan funded only by company contributions. Company contributions may be determined by a fixed formula or may be at the discretion of the board of directors. Whereas the overall amount of contribution made by the employer may be left to the employers discretion, the “allocation” of such contributions between eligible employees is always defined by a formula.

Qualified Domestic Relations Order (QDRO)
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.

Qualified Joint and Survivor Annuity (QJSA)
An annuity with payments continuing to the surviving spouse after the participant's death, equal to at least 50% of the participant's benefit.

Qualified Plan
Any plan that qualifies for favorable tax treatment by meeting the requirements of section 401(a) of the Internal Revenue Code and by following applicable regulations. Qualified plans include 401(k) and deferred profit sharing plans.

The action of moving plan assets from one qualified plan to another or to an IRA within sixty days of distributions, while retaining tax-deferred status.

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.

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Safe Harbor Rules
Provisions that exempt certain individuals or kinds of companies from one or more regulations.

Savings Incentive Match Plan for Employees
See SIMPLE Plan.

Schedule SSA
A form that must be filed by all plans subject to ERISA Section 203 minimum vesting requirements. The schedule, which is attached to Form 5500, provides data on participants who separated from service with a vested benefit but were not paid their benefits.

Service Provider
A person or entity that provides any type of service to the plan, including managing assets, recordkeeping, providing plan education, and plan administration.

SIMPLE 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 non-elective 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.

Simplified employee-pension plan (SEP)
A defined contribution plan in which employers make contributions to individual employee accounts (similar to IRAs) for all eligible employees.

Stock Bonus Plan
A defined contribution plan in which company contributions are made in the form of company stock.

Summary Annual Report
A report that companies must file annually on the financial status of the plan. The summary annual report must be automatically provided to participants every year.

Summary of Material Modifications
A notice that is distributed to plan participants summarizing “material changes” made to a plan’s document provisions.

Summary Plan Description (SPD)
A simplified 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. Sometimes referred to as an “employee booklet”.

Target-Benefit Plan
A type of defined contribution plan in which company contributions are based upon the age of an employee as well as their compensation. It is designed to provide a theoretical (“target”) benefit
to each participant upon retirement. The plan does not guarantee that such benefit will be paid; the actual benefit provided will be determined by the amount in the participant's account at retirement. It is a hybrid of a money-purchase plan and a defined-benefit plan.

Tax Sheltered Annuity (TSA)
Also known as a 403(b) plan, a TSA provides a tax shelter for 501(c)(3) tax exempt employers (which include public schools). Employers qualifying for a TSA may defer taxes on contributions to certain annuity contracts or custodial accounts.

Top Heavy Plan
A plan in which 60% of account balances (both vested and non-vested) are held by certain highly compensated employees. NOT to be confused with a 401(k) plan which fails either the ADP or ACP test.

The individual, group of individuals, bank, or trust company having fiduciary responsibility for holding plan assets.

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The participants’ ownership right to company contributions.

Vesting Schedule
The structure for determining participants' right to company contributions that have accrued in their individual accounts, similar to their “ownership interest” in their employer contributed accounts. In plans with graduated vesting, vesting occurs in specified increments

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