Account Balance: A participant’s monetary interest in the plan with respect to employer and/or employee contributions. A participant’s account balance will increase with investment earnings and contributions, and decrease with investment losses and withdrawals from the trust. Once vested, a participant’s account balance cannot be forfeited.
Accrued Benefit: In a defined benefit plan, that portion of a participant’s projected normal retirement benefit he has earned based on his salary/wages and years of service to-date. Once earned, a participant’s accrued benefit cannot be reduced, and once vested, it cannot be forfeited.
Actual Deferral Percentage (ADP) Test: A test applied to 401(k) plans to ensure that salary deferrals made by highly compensated employees do not exceed salary deferrals made by non-highly compensated employees by more than a non-discriminatory amount.
Actuarial Assumptions: Assumptions that are made about investment return, mortality, turnover, and other factors concerning plan participants to determine the employer’s required annual funding of a defined benefit plan.
Administrator: See Plan Administrator.
Adoption Agreement: The written document used for designating which provisions in a master or prototype plan apply to a given retirement plan.
Aggregation Rules: Rules that determine whether affiliated companies will be considered one entity for retirement plan purposes, including employee coverage and employer contributions.
Allocation Formula: A mathematical formula or method used to divide the employer’s contribution among eligible participants in a defined contribution plan. The allocation formula is set forth in the adoption agreement or written plan document.
Anti-cutback Rules: Rules that state that once a participant has accrued a benefit or has received a contribution, the benefit or contribution cannot be reduced. Future reductions in accruals or contributions can be made, however, with advance notice to participants and beneficiaries.
Beneficiary: A person designated by a participant (or by the terms of an employee benefit plan) who is or may become entitled to a benefit upon the death of the participant.
Blackout Notice: Written notice to participants and beneficiaries of an up-coming blackout period. The notice must be understandable to the average participant and contain language stating: (1) the reasons for the blackout, (2) the investments and other rights affected, (3) the expected beginning date and duration of the blackout period, (4) that participants and beneficiaries should evaluate the appropriateness of their current investments in light of their inability to change them during the blackout period, (5) if 30 days advance notice is not furnished, an explanation as to why the plan was unable to furnish the notice at least 30 days in advance, and (6) the name, address and telephone number of the Plan Administrator or other contact responsible for answering questions concerning the blackout period.
Blackout Period: Any period during which participants and beneficiaries are temporarily suspended, limited, or restricted from directing investments, obtaining loans, or obtaining distributions for a period of more than three consecutive business days.
Catch-up Contributions: For a participant who has reached age 50 or older, that portion of the participant’s 401(k) deferral contributions that would otherwise exceed any statutory or plan limit, or cause the Actual Deferral Percentage (ADP) Test to fail. A participant is considered age 50 if they attain age 50 on or before December 31st of the year in question. Please see Current Limits for a list of maximum Catch-up Contributions by year.
Compliance Testing: Numerical measurements or “tests” required by the IRS to demonstrate that a plan satisfies the Internal Revenue Code and regulations with respect to minimum contributions and benefits on behalf of participants, as well as maximum contributions and tax deductions by employers.
Custodian: The bank, trust company, or broker that maintains a retirement plan’s assets, including its securities or some record of them. Custodians provide safekeeping of securities, but generally have no role in the investment management of the trust.
Defined Benefit Plan: A defined benefit (DB) plan is an employer-maintained plan that pays a promised monthly benefit to retirees after reaching the plan’s normal retirement date. Benefits earned in some DB plans are guaranteed by the PBGC.
Defined Contribution Plan: Unlike a defined benefit plan, a defined contribution (DC) plan does not promise a specific benefit at retirement. Rather, a DC plan provides regular employer and/or employee contributions to a trust fund. Defined contribution plans are not covered by PBGC insurance.
Determination Letter: A letter from the IRS stating that the plan satisfies, in form, the requirements for tax qualification.
Discrimination Testing: To meet Internal Revenue Service guidelines, every qualified retirement plan must pass a series of numerical measurements each year, known as discrimination tests, to make sure that a plan benefits both highly compensated and non-highly compensated employees fairly.
Employee Benefits Security Administration (EBSA): The branch of the Department of Labor responsible for overseeing retirement plans
Employee Pre Tax Deferral: The dollars that employees contribute to their 401(k) plans on a pre-tax basis, in lieu of receiving those dollars as cash compensation.
Employee Post Tax Roth Deferral: The dollars that employees contribute to their 401(k) plans on a post-tax basis, in lieu of receiving those dollars as cash compensation.
Employer Deduction: The tax deduction an employer receives for contributions made to a qualified retirement trust, provided the contributions satisfy statutory limits and are made by the due date for filing the employer’s federal income tax return (with extensions).
Employer Matching Contribution: The amount that an employer contributes to employees’ 401(k) accounts to encourage/reward them for making employee deferral contributions to the plan. Matching contributions are typically a set percentage of an employee’s deferral contributions up to a fixed limit.
Enrollment Date: The date on which an employee who has satisfied a 401(k) plan’s eligibility requirements may begin making employee deferral contributions to the plan. Some plans allow for automatic enrollment, meaning an employee who has met the plan’s age and/or service requirements will have a minimum employee deferral contribution deducted from his paycheck each pay period unless he makes a specific election to not be enrolled in the plan, or to contribute an amount different than the automatic minimum.
Entry Date: The date on which an eligible employee who has met the plan’s eligibility requirements becomes a participant.
ERISA: Employee Retirement Income Security Act. ERISA, passed in 1974, is a comprehensive package dealing with all areas of pensions and employee benefits. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration. ERISA also mandated the creation of the Pension Benefit Guaranty Corporation (PBGC).
ERISA Bond: A fidelity bond to provide protection to the plan against loss by reason or acts of fraud or dishonesty on the part of the plan’s bonded officials (every fiduciary and every person who handles funds or other property of the plan).
Exclusive Benefit Rule: A rule that prevents misuse of the retirement plan. A fiduciary is required to perform all duties solely in the interest of participants and their beneficiaries.
Fiduciary: The Plan Administrator, the Trustee, and any other person who has discretionary authority or control in the management of the plan or the disposition of trust assets.
Fiscal Year: The employer’s accounting period (or tax year).
Forfeitures: The non-vested portion of a participant’s account balance that is lost by the participant when the vested portion of his account balance is paid to the participant or beneficiary. Forfeitures can be reallocated among the remaining participants or used to reduce the employer’s cost of funding current contributions.
Form 5500: ERISA requires the Plan Administrator to file an annual report disclosing information relating to the plan’s qualified status, financial condition, and operation. Annual reports are filed on the Form 5500 series.
The 5500 series (5500 or 5500-EZ) must be filed for each year in which the plan has assets. If the plan covers a sole owner, a sole owner and spouse, or only partners in a partnership, Form 5500-EZ may be filed. Form 5500-EZ is not available to businesses that are members of controlled groups, affiliated service groups, or groups that employ leased employees.
If a plan is eligible to file Form 5500-EZ, no reporting is necessary while plan assets are less than $250,000. All plans of the employer must be aggregated for purposes of the $250,000 limit. Once a plan files with over $250,000 in assets, it must continue to file even if assets drop below $250,000.
For all plans with 100 or more participants, a certified public accountant or licensed public accountant must conduct an audit of the plan’s financial statements and schedules. The accountant must not have a financial interest in the plan or the plan sponsor, and the audit must express an opinion on the financial statements and schedules, as well as the accounting principles and practices used by the plan. There is a “transition year” rule whereby if a plan has between 80 and 120 participants as of the beginning of the plan year, the plan may elect to be treated as having filed as a small plan in the prior year.
Plans with fewer than 100 participants must also obtain an accountant’s opinion unless the following conditions are met:
- At least 95 percent of the plan’s assets are invested in qualifying plan assets, or the assets that are not qualifying plan assets must be covered by a bond meeting the requirements of ERISA Section 412; and
- The summary annual report (SAR) for the plan includes disclosure of the name of each institution holding qualifying plan assets, the amount of assets held as of the end of the plan year, and notification of the participants’ right to receive financial statements describing these assets; information about any surety company issuing a bond as required by item 1 above and advising participants of their right to receive a copy of the bond without charge; and notification of the participants’ right to contact the Department of Labor’s Employee Benefits Security Administration (EBSA) if they are unable to obtain any of these documents.
The plan must file the Form 5500 or 5500-EZ with the required attachments by the last day of the seventh month following the close of the plan year. An extension of 2 ½ months may be obtained by filing Form 5558 before the due date of the Form 5500 series. As an alternative, Form 5500 may be automatically extended (without filing Form 5558) if the following requirements are met:
- The employer maintaining the plan has obtained an extension for filing its federal tax return; and
- The plan year coincides with the employer’s taxable year. In this case, the extension is to the extended due date of the federal income tax return (generally 1 ½ months). It is then only necessary to attach a copy of the federal tax return extension to the Form 5500 filing.
The Department of Labor has authority to assess penalties of up to $1,100 per day (with no maximum) for late filing. The penalty period begins from the due date of filing, regardless of any extensions obtained, and generally continues to the date a satisfactory return is filed.
The IRS may assess a penalty of $25 per day up to a maximum of $15,000 for late filing. The penalty begins to run on the due date of the return. If an extension has been filed, the penalty begins to run on the extended due date.
401(k) Plan: A defined contribution profit sharing plan that gives employees the option of reducing their taxable salary/wages by making pre-tax contributions to the plan.
403(b) Plan: A retirement plan similar to a 401(k) plan that is available to certain tax-exempt organizations and to public schools.
404(c): Internal Revenue Code Section permitting the plan sponsor to provide certain information and fund choices so participants can make informed decisions about their retirement plan investments, thereby reducing the plan sponsor’s liability for choices made by participants.
Frozen Plan: A qualified plan that does not permit continued accruals of benefits or additional contributions for existing employees, nor permit the entry of new plan participants.
Graded Vesting: A vesting schedule under which the participant gradually becomes entitled – over a period of years – to keep his accrued benefit or account balance in the event he separates from service with the employer. For example, the “2-20” vesting schedule provides no vesting until 2 years of service have been completed. After 2 years of service, the participant becomes 20% vested, and he continues to vest 20% for each year of service thereafter. After 6 years of service, therefore, the participant is 100% vested.
Hardship Withdrawal: A withdrawal permitted under a 401(k) plan or 403(b) plan if the participant has an immediate and heavy financial need and no other resources available to meet that need. An immediate and heavy financial need can arise for any of the following reasons:
- medical expenses which the participant, his spouse, or his dependents incur;
- purchase of the participant’s principal residence;
- payment of tuition for the next 12 months of post-secondary education for the participant, his spouse, or his dependents; or
- to prevent eviction from or foreclosure on the participant’s principal residence.
- payments for funeral or burial expenses for a deceased spouse, parent, child or dependent
- expenses to repair damages to a principal residence that would qualify for a causality loss deduction
Highly Compensated Employee (HCE): An employee who received more than $120,000 (indexed) in compensation during the last plan year or owns more than 5% of the company. Please see Current Limits for the indexed compensation amounts for determining HCE status.
Hour of Service: Any hour for which a participant is paid or entitled to be paid.
Incidental Death Benefit Rule: ERISA rules that limit the amount of life insurance permitted in a qualified plan.
Integration: A retirement plan design in which projected Social Security benefits are taken into consideration in the allocation or benefit formula. Since Social Security provides a greater benefit (as a percentage of annual pay) to lower paid employees, integration allows the plan to provide larger benefits to employees who earn more than Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) benefit base. For a list of the OASDI benefit bases by year, go to: http://www.ssa.gov/OACT/COLA/cbb.html
Investment Manager: Any fiduciary who has the power to manage, acquire, or dispose of assets of a plan, who is a Registered Investment Advisor, a bank, or an insurance company, and who has acknowledged in writing that he is a fiduciary with respect to the plan.
Joint and Survivor Annuity: An annuity for the life of the participant which continues with payments for the life of the beneficiary if the beneficiary is still alive at the time of the participant’s death.
Key Employee: Any employee who, during the determination period (generally, the plan year), is an officer, is a 5% owner of the employer, or is a 1% owner of the employer having annual compensation from the employer greater than $165,000 (indexed).
Non-Highly Compensated Employee (NHCE): Any employee who is not a Highly Compensated Employee.
Non-Key Employee: Any employee who is not a Key Employee.
Normal Retirement Age: The earlier of (a) the time a participant attains normal retirement age as defined in the plan, or (b) the later of the time a participant attains age 65 or the 5th anniversary of plan participation.
One-Year Break in Service: A designated consecutive 12-month period (the same designated period used to measure a year of service for eligibility) during which the employee has not completed more than 500 hours of service with the employer.
Owner-Employee: An employee who owns the entire interest in an unincorporated trade or business, or in the case of a partnership (or limited liability company), is a partner (or member) who owns more than 10% of either the capital interest or the profits interest in the partnership (or limited liability company).
Partial Termination: A partial termination occurs when a group of employees who were covered by a plan are excluded by either plan amendment, severance from service with the employer, or discontinuance of contributions by the employer. If a plan is partially terminated, all affected participants become 100 percent vested in their accounts and/or accrued benefits. The 100% vesting requirement only applies to affected participants – that is, participants who were actually excluded or who separated from service in connection with the event.
Participant: An eligible employee who has satisfied the plan’s age and/or service requirements and has reached his entry date.
Past Service: Service prior the inception of a new plan which may or may not be recognized for vesting or eligibility purposes. In a defined benefit plan, the employer has the option of funding for past service or not.
PBGC: Pension Benefit Guarantee Corporation. The PBGC is an entity established by ERISA, which covers most defined benefit plans. An employer with a defined benefit pension plan must pay annual PBGC premiums into this fund. The amount of each year’s premium is determined by the number of employees in the plan and the current ratio of plan assets to plan liabilities. If the defined benefit plan is unable to pay benefits earned under the plan, the PBGC may step in and pay benefits up to a limit set by ERISA.
Permanency Requirement: The requirement that all qualified plans must be intended to be permanent.
Plan Administrator: The individual, employer, or committee named in the plan document as responsible for operating the plan for the exclusive benefit of participants and their beneficiaries, while following the terms of the plan, the Internal Revenue Code, and ERISA. The employer is generally the Plan Administrator if no other entity is named.
Plan Termination: The means by which the employer may discontinue his or her obligation to make contributions to a defined contribution plan or to fund benefits in a defined benefit plan. Upon plan termination, all participants become 100% vested.
Plan Year: The calendar or fiscal year on which the records of the plan are kept.
Present Value of Accrued Benefit: A calculation used in defined benefit plans to place a value today on a future payment, or stream of payments, discounted at an appropriate interest rate.
Prohibited Transaction: A transaction by a fiduciary, involving plan assets, which benefits any trustee or person or entity connected to the plan. Examples of these persons are owners and participants, their relatives, the company sponsoring the plan, persons supplying service to the plan, and organizations owned by owners of the company sponsoring the plan. Attorneys specializing in ERISA law should be consulted with questions about whether a given transaction is prohibited.
Prudent Man Rule: A rule that states a plan fiduciary must perform his or her duties as a prudent man would perform them under like circumstances, or else legal liability will be incurred. A fiduciary must use the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity would use.
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 Plan: A private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible; earnings on such contributions are tax-sheltered until withdrawn.
Qualified Pre-retirement Survivor Annuity (QPSA): A death benefit provided to the surviving spouse of a participant who dies prior to retirement.
Qualifying Plan Assets:
- Qualifying employer securities;
- Shares issued by a mutual fund that is registered under the Investment Company Act of 1940;
- Assets held by a regulated financial institution, which includes banks, credit unions, registered broker-dealers, insurance companies, and any other organization authorized to act as an IRA trustee under Internal Revenue Code Section 408(a)(2);
- Participant loans that satisfy the prohibited transaction exemption requirements of ERISA Section 408(b)(1);
- Investment and annuity contracts issued by an insurance company;
- Assets held in the individual account of a participant or beneficiary over which the participant or beneficiary has the right to exercise control and with respect to which the participant or beneficiary is furnished with an annual statement describing the assets.
Ratio Percentage Test: A non-discrimination/coverage test that a plan must satisfy every year. A plan must benefit a percentage of non-highly compensated employees that is at least 70% of the percentage of highly compensated employees benefiting under the plan. A participant is considered “benefiting” if he accrues an additional benefit under a defined benefit plan or receives a contribution under a defined contribution plan.
Rollover: An employee’s transfer of retirement funds from one retirement plan to another, or to an IRA, without incurring a tax liability.
Self-employed Individual: With respect to any taxable year, an individual who has earned income reportable on Schedule C (Form 1040) or K-1 (Form 1065) for the taxable year.
Standard Termination: A voluntary termination of a defined benefit plan in which the retirement trust has sufficient assets to pay its benefit commitments.
Summary Annual Report (SAR): A summary of the annual Form 5500 that must be provided to plan participants every year in order to meet the disclosure requirements of the Department of Labor.
Summary of Material Modification: A notification to participants of amendments made to the plan’s Summary Plan Description.
Summary Plan Description (SPD): A document explaining to participants the provisions of their retirement plan. The SPD must be written in non-technical language which participants are estimated to have the ability to understand.
Target Benefit Plan: A hybrid retirement plan that uses a benefit formula like that of a defined benefit plan and individual accounts like those of a defined contribution plan.
Third-Party Administrator (TPA): A service provider that offers design, consulting, record-keeping, quasi-legal, and actuarial services to support the legal Plan Administrator.
Tiered Allocation Plan: A defined contribution plan design under which participants are grouped into different “tiers” (based on job classification, for example), and employer contributions are allocated at different rates to each tier. The allocations are converted to projected benefits at retirement and then tested under the 401(a)(4) general non-discrimination test. Other terms used synonymously are “cross-tested” and “new comparability.”
Top Heavy: When more than 60% of a plan’s (or a group of plans’) account balances and/or present value of accrued benefits belong to the key employees. If a plan becomes top heavy, employer contributions may be required.
Trust: All assets held by the Trustee under the terms of the plan.
Trustee: The party named in the trust agreement – or, if no separate trust agreement is executed, in the trust provisions of the plan document – that is authorized to hold the assets of the plan for the benefit of the participants. The Trustee may function merely in the capacity of a custodian of the assets or may be given authority over the investment of the assets.
Valuation Date: The date as of which trust investment earnings, gains, and losses are allocated to participant’s accounts.
Vested: The non-forfeitable portion of a participant’s account balance or accrued benefit.
Year of Service: A 12-consecutive month “computation period” during which the employee has worked at least 1,000 hours for the employer.
For determining eligibility, the first 12-month computation period commences on an employee’s date of employment. Subsequent computation periods may be measured on each anniversary of an employee’s date of employment. Alternatively, the plan may shift the computation period to the plan year, beginning with the first plan year following the employee’s date of employment.
For determining vesting, the 12-month computation period is typically the plan year.
Attachments to Form 5500 or 5500-EZ
Schedule A – Insurance Information: Reports insurance information, including policy and premium information, where the plan provides benefits through an insurance company.
Schedule C – Service Provider and Trustee Information: Reports service provider and trustee information. The plan reports on this schedule any fees or commissions paid to a service provider (including a trustee) in excess of $5,000. Only plans with 100 or more participants must file Schedule C.
Schedule D – DFE/Participating Plan Information: Reports information regarding plans which participated or invested in common/collective trusts, pooled separate accounts, master trust investment accounts and 103-12 Investment Entities. The schedule also reports information for Direct Filing entitles.
Schedule F – Fringe Benefit Plan Annual Information. Is a required attachment for fringe benefit plans described in Code 125 (Cafeteria Plan) and 127 (Educational Assistance Program), for which Code 6039D requires an annual report.
Schedule H & Schedule I – Financial Information: Reports the current value of plan assets and liabilities and plan income, expenses, transfers, changes in net assets and other financial transactions during the plan year. Schedule H applies to plan with 100 or more participants at the beginning of the plan year; Schedule I applies to plans with non-qualified assets having fewer than 100 participants at the beginning of the plan year.
Schedule R – Retirement Plan Information: Reports distribution and funding information.
Schedule SB – Actuarial Information: Reports actuarial information and is a required attachment with the annual return/report of any defined benefit plan subject to the minimum funding standards. Schedule B contains information regarding funding waivers, the funding method, actuarial costs, and the funding standard account. Schedule SB satisfies the actuarial report requirement.
Schedule 8955-SSA – Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits: In order to ensure employees receive all benefits to which they are entitled, ERISA established a record keeping system for vested benefits. ERISA requires Plan Administrators of all employee pension benefit plans subject to the vesting standards under Title I to file a registration statement with the Internal Revenue Service for each year in which a participant separates from service without receiving vested benefits under the plan. The Internal Revenue Service then will notify the Social Security Administration of the vested benefits payable, and Social Security will notify the participant upon his filing for social security benefits that he is due a benefit from the plan. Schedule 8955-SSA is the form of registration statement the plan must file separate of its annual return/report (Form 5500).