1,000 Hour Rule
In general, an employee will be given credit for a year of service for eligibility, vesting or benefit accrual purposes and/or for benefit accrual purposes if the employee completes at least 1,000 hours of service during a given twelve-month period.
A single employer wishing to amend an ERISA-covered pension plan in a way that will significantly reduce the rate of future benefit accruals must give a written notice of the amendment before it is to take effect. Failure to give the proper notice can render the amendment null and void!
A type of profit sharing plan that permits participants to elect to defer a portion of their salaries on a pre-tax basis. An employer may encourage participants’ salary deferrals by offering to match the deferrals with an employer contribution. 401(k) plans are subject to special rules and restrictions beyond those applicable to regular profit sharing plans.
A plan sponsored by a Code section 501(c)(3) tax-exempt organization (including a church) or a state educational organization funded with annuity contracts or custodial accounts (mutual funds). Also referred to as tax-sheltered annuities (TSAs) or tax-deferred annuities (TDAs), these plans may permit employee deferrals only, or a combination of employee deferrals and employer contributions, whether by a percentage of pay or pursuant to a matching formula. These plans may be subject to title I of ERISA if not a governmental plan and if the employer is deemed to be actively maintaining a plan under ERISA.
A section of ERISA that provides an exception to ERISA’s general fiduciary rules in the case of certain individual account plans that permit participants to direct the investment of their plan accounts. In situations where plan fiduciaries properly comply with the rules of ERISA 404(c), the plan’s fiduciaries generally will not be held liable for the results of participants’ investment choices.
Section of the Code added to significantly tighten the rules governing the documentation and operation of many types of nonqualified deferred compensation plans and arrangements.
The Code’s limit on maximum benefits payable to a participant from a defined benefit pension plan.
The maximum amount that may be contributed for a participant to a defined contribution plan on an annual basis.
The combined limit on contributions and benefits which may be made on behalf of, or allocated to the account of, a participant who participates in both a defined contribution plan and a defined benefit plan sponsored by the same employer. Repealed effective as of January 1, 2000.
A deferred compensation plan sponsored by a state or local government entity or a tax-exempt organization. If the plan is for a government employer, it generally will be exempt from Title I of ERISA.
The same as a 204(h) notice except that it is required for a plans that is not subject to ERISA solely because it covers only the owners of the sponsoring employer.
Actual Contribution Percentage Test
A test applicable to 401(k) plans and other plans with employer matching contributions (and employee after-tax contributions) that works to limit the average rate of employer matching contributions (and employee after-tax contributions) made for the benefit of highly paid participants in relation to the average rate of employer matching contributions made for the benefit of lower-paid participants.
Actual Deferral Percentage Test (ADP)
A test applicable to 401(k) plans which works to limit the average rate of pre-tax deferrals made by highly-paid participants in relation to the average rate of pre-tax deferrals by lower-paid participants.
The interest rate(s) and mortality table (based on life expectancies) used by actuaries to determine the present value of an annuity or to convert a single sum into an annuity.
Adjusted Gross Income (AGI)
Gross income minus the deductions allowed by Code section 62.
Affiliated Service Groups
Under the rules set forth in Code section 414(m) and related regulations, certain groups of employers which provide certain types of services to one another or together with one another to third parties must be treated as a single employer for retirement plan and welfare plan purposes.
Age-Weighted Profit Sharing Plan
A qualified profit sharing plan under which the formula for allocating employer contributions to employees’ accounts is based in part upon the attained age of such employees at the time when the contributions are made.
Periodic payments of specified or objectively determinable amounts payable over a specified period of time or over the lifetime of the recipient. Annuities payable from a retirement plan are generally payable as a monthly annuity for the lifetime of the pensioner or for the lifetime of the pensioner and then continued to the pensioner’s survivor for his or her lifetime.
Rules provided in Code section 411(d)(6), Code section 412, ERISA section 204(g), ERISA section 302(c)(8) and ERISA section 4281, and their regulations, which provides that an amendment to a plan will not be permitted where it has the effect of eliminating or reducing either an early retirement benefit, a retirement type subsidy, or an optional form of benefit, to the extent that these forms of benefit are attributable to service before the amendment. This would be considered a prohibited “cutback of a protected benefit.”
Anti Discrimination Rules
Rules under Code section 401(a)(4) which prohibit certain types of discrimination under a qualified retirement plan in favor of highly compensated employees.
Provisions of the Code which provide that ownership interest in partnerships and corporations will be deemed to be owned by other family members including lineal descendants and ancestors. Attribution rules for retirement plan purposes are borrowed from the general attribution provisions of the income tax sections of the Code such as Code section 267(b) and Code section 318.
Audit Closing Agreement Program (Audit CAP)
Program under the IRS’s Employee Plans Compliance Resolution System that permits plan sponsors to pay a sanction and correct a plan failure while the plan is under audit. See also: Employee Plans Compliance Resolution System; Self-Correction Program; and Voluntary Correction Program.
Amounts that are credited as earned toward a participant’s retirement benefit, under a defined benefit pension plan, or a participant’s account balance under a defined contribution plan.
A fringe benefit plan under which an employee can elect to use pre-tax employer or employee funds for a choice of two or more benefits consisting of cash and one or more fringe benefits such as dependent care assistance, medical reimbursements or insurance.
Cash Balance Plan
A defined benefit plan that simulates a defined contribution plan. Benefits are definitely determinable, but hypothetical account balances are credited with a predetermined rate of return and converted to a monthly pension benefit at retirement.
A plan which is established or maintained for the employees of a church or by a convention or association of churches which is exempt from tax under Code section 501. Employees, for purposes of church plans, include common law employees and duly ordained commissioned or licensed ministers.
A published category of transactions that the DOL will consider exempt from the prohibited transaction rules. All transactions, plans, and parties in interest that come within the parameters of a published class exemption can rely on the terms of a published class exemption to avoid excise taxes and other penalties.
Closely Held Business
A business which is owned by a small group of investors such as management, founders or their families.
Closing Agreement Program (CAP)
An IRS program under which a retirement plan sponsor can agree to enter into a written settlement with the IRS and pay a monetary penalty in order to avoid the disqualification of the sponsor’s retirement plan.
The Consolidated Omnibus Budget Reconciliation Act of 1985. The acronym is commonly used to refer to the health care continuation rights which were established as part of the Act.
The Internal Revenue Code of 1986, as amended.
In general, any fiduciary of an ERISA-covered plan. Co-fiduciary status refers to the duties and responsibilities of one fiduciary with respect to the acts or omissions of another fiduciary of a plan.
Generally refers to the legislative history found in the published reports of the staff of the Senate Finance Committee, the House Ways and Means Committee, and the Joint Committee on Taxation at the time of and shortly after the enactment of new tax legislation. The Committee Reports sometimes give an indication of what Congress was thinking (or not) when enacting otherwise unintelligible Code sections.
A review conducted by the employer, or outside advisors hired by the employer, to determine whether an employee benefit plan complies with various legal requirements, including the Code, ERISA or other federal or state laws and regulations. Compliance audits can focus on one particular aspect of the plan, or can be broad based and review a variety of issues related to a particular employee benefit plan.
An individual retirement account that is used only as a transitory repository of a rollover distribution from a qualified retirement plan until the funds may be re-rolled into another qualified plan.
The hypothetical “contribution,” usually as a percentage of pay, that is made to a participant’s hypothetical account under a cash balance plan, at least annually, as required by the cash balance plan’s formula.
Multiple employers with a sufficient degree of common ownership that are treated as a single employer for purposes of qualification, deductions, participation, vesting, and limitations on contributions or benefits. Controlled groups can be groups of corporations or groups of businesses, incorporated or not, using similar principles of common ownership.
Charitable Remainder Interest Trust, Charitable Remainder Annuity Trust, Charitable Remainder Unit Trust, all variations on the theme of estate planning devices which permit a current deduction for contributions to a trust which ultimately pays a remainder interest in the property to a charity while paying an income interest to the donor during his lifetime.
A defined contribution plan, whether a profit sharing or money purchase, which calculates its benefits based upon age and retirement assumptions to allocate benefits in a nondiscriminatory fashion as permitted in the nondiscrimination regulations under Code section 401(a)(4). (Also referred to as benefit based plans, tiered plans and general testing plans.)
Declaration Of Transmutation
A written document by which a spouse converts community property assets to separate property in accordance with certain specific requirements of California’s community property laws.
A term coined by the Department of Treasury to describe the taxable event of a loan failing to qualify for the participant loan safe harbor of Code section 72(p).
Defined Benefit Plan
A pension plan which establishes how much a participant will be entitled to receive under certain circumstances such as retirement and which is funded by making certain actuarial assumptions to determine how much must be contributed and invested to fund the plan adequately to pay benefits under those assumptions (i.e., the benefit is “defined” and the plan is funded to meet that benefit).
Defined Contribution Plan
A plan that maintains an individual account for each participant and under which each participant’s benefits are based on the amount contributed to the account adjusted for any income, expenses, or losses allocated to the account.
The Deficit Reduction Act of 1984.
A failure under EPCRS to satisfy the requirements of Code section 401(a)(4), 401(a)(26), or 410(b), that is not an operational failure.
Department Of Labor (DOL)
The federal agency that is charged with enforcing the provisions of ERISA and does so through a national office which dictates policy and deals with rulings and exemptions and field offices or regional offices which are charged with investigation and enforcement of the laws.
Dependent Care Assistance Program (DCAP)
Plans that are intended to provide benefits for employees who require child care or related services in order to work. Under Code section 129, employees are entitled to exclude from income all or a portion of the benefit provided by the employer. A DCAP may stand alone or be part of a cafeteria plan.
A letter issued by the IRS stating whether a retirement plan is a qualified plan, and if applicable whether it includes a qualified trust. Obtaining a favorable determination letter is not necessary although they are almost universally accepted as desirable. A favorable determination letter provides a high degree of protection to subsequent challenge by the IRS that the plan document was not adequate or qualified. The determination letter does not provide protection against defects in plan operation which can disqualify the plan.
A trustee who invests plan assets according to the investment instructions received from a named fiduciary such as the plan’s administrative committee or the employer. If certain requirements are met, directed trustees may not be responsible for investment performance.
Loss of tax favored or qualified status for a retirement plan. Disqualification is generally viewed as being in the discretion of the IRS based upon either a failure of the plan’s terms or the operation of the plan.
A plan provision violating the qualification rules and resulting in disqualification of the plan.
Cash, shares of stock, notes or other property distributed to the shareholders of a corporation and normally debited to retained earnings.
Domestic Relations Order
An order by a state court dealing with community property probate or other matters incident to divorce, property settlement or custody and care of dependents and which attempts to exercise or jurisdiction over a participant’s accrued plan benefits.
To disqualify a retirement plan; that is, to cause the plan to lose its income tax qualified status under the Code.
Form of IRA created by TRA ’97 which allows nondeductible annual contributions of up to $500 per child with tax-free earnings and withdrawals. These are now referred to as “Coverdell Accounts.”
The Economic Growth And Tax Relief Reconciliation Act Of 2001.
An employee who has met the eligibility requirements set forth in a retirement plan.
Eligible Individual Account Plan (EIAP)
A targeted equity program that allows certain pre-tax transfers, purchases and sales of shareholder equity on more flexible terms than an Employee Stock Ownership Plan (ESOP).
Employee Benefits Security Administration (EBSA)
The agency within the DOL that is charged with enforcing many of the provisions of ERISA. Formerly known as the Pension And Welfare Benefits Administration (PWBA).
Employee Welfare Benefit Plan
Generally, any plan, fund, or program established or maintained by an employer to provide medical, surgical, or hospital benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation, apprenticeship or other training programs, or day care centers, scholarship funds, or pre-paid legal services. In certain cases, limited severance pay plans are treated as welfare benefit plans.
Employer Real Property
This generally refers to real estate which is leased to the employer sponsoring a retirement plan.
This generally refers to company stock issued by the sponsor of a retirement plan.
Enrolled Actuary (EA)
A person who performs actuarial services for a plan and who is enrolled with the federal Joint Board for the Enrollment of Actuaries.
The IRS’s Employee Plans Compliance Resolution System. EPCRS is a comprehensive system which describes various programs under which plan sponsors can correct operational failures and, in some cases, plan document failures in their retirement plans. EPCR is comprised of the: Self-Correction Program (SCP); Voluntary Correction Program (VCP); and, Audit Closing Agreement Program (Audit CAP).
The Employee Retirement Income Security Act of 1974 as amended. A comprehensive piece of federal legislation designed to regulate the provision of private employer retirement and welfare benefits.
ERISA Section 204(h) Notice
Notice which must be provided to participants in certain types of retirement plans at least 15 days prior to the effective date of any significant reduction in future benefit accruals. If not provided, any such amendment providing for benefit reductions may be nullified.
ERISA’s Fiduciary Rules
The duties imposed by trustees and administrators of both the Internal Revenue Code and Title I of ERISA, which relate to the receipt, handling, investment of and disposition of plan assets. These duties also prohibit a fiduciary from engaging in certain transactions.
An employee stock ownership plan is a stock bonus plan or a combination of money purchase plan and stock bonus plan which is specifically designed to invest in the stock of the company sponsoring the plan.
Excess Aggregate Contributions
The aggregate amount of employee contributions and matching contributions to highly compensated employees’ accounts for a plan year that exceeds the maximum amount of such contributions permitted under the actual contribution percentage test. If excess aggregate contributions are allowed to stay in the plan beyond a certain date, the plan could be disqualified by the IRS.
Excess Benefit Plan
A type of nonqualified deferred compensation plan established by an employer solely for the purpose of providing benefits for certain employees in excess of the limits on contributions and benefits imposed by the Code with respect to qualified retirement plans.
The elective contributions to highly compensated employees’ accounts for the plan year that exceeds the maximum amount of contributions permitted under the actual deferral percentage test. If excess contributions remain in the plan beyond a certain date, the plan could be disqualified by the IRS.
A loan to an ESOP for the purposes of acquiring qualifying employer securities is exempt from the prohibited transaction rules that normally prevent employee benefit plans from borrowing money, if certain conditions are met.
Family Aggregation Rules
Now repealed, the family aggregation rules required compensation or plan contributions or benefits of certain family members of certain highly compensated employees to be attributed to the highly compensated employee for purposes of nondiscrimination testing. The family aggregation rules were eliminated by the Small Business Job Protection Act of 1996.
Family And Medical Leave Act (FMLA)
Federal legislation which requires certain employers to provide eligible employees up to 12 weeks of leave for their own serious illness, the birth or adoption of a child, or the care of a seriously ill child, spouse or parent.
FAS-87 Pension Expense Disclosure
The statement issued by the FASB regarding employers’ reporting of accrued pension liabilities on their financial statements.
Any person who has or exercises discretionary authority or control over the management or disposition of plan assets or the administration of a plan or who gives investment advice to a plan for a fee or other compensation.
Financial Accounting Standard Board (FASB)
The independent, private (nongovernmental) authority for establishing accounting principles in the United States. It is a successor to the Accounting Principles Board. It promulgates financial accounting standards for CPAs to follow.
A method of accounting for the tax “basis” in inventory. It requires gain on sales of inventory to be measured on a “first-in-first-out” basis.
Flexible Spending Account (FSA)
An account under a cafeteria plan through which the employees are reimbursed for medical and other expenses not covered by insurance. FSAs may not be used to accumulate funds in one year in order to pay benefits in future years. Separate FSA accounts must be maintained for medical expenses and for other reimbursable expenses such as child care.
The portion of a participant’s benefits under a plan which are not yet vested.
An information reporting return filed annually for all recipients of distributions from qualified and nonqualified retirement plans. The income reported on these forms must be reported in exact amounts on the recipient’s individual income tax return.
The combined IRS, Department of Labor and Pension Benefit Guaranty Corporation (PBGC) annual report to be filed by qualified retirement plans with 100 or more participants. Shorter versions of this form, the 5500-C, 5500-R and 5500-EZ are filed for smaller plans with less than 100 participants. All are sometimes generally referred to as the Form 5500.
A new withholding and recording form for withholding federal income tax from retirement plan distributions which will be filed on an annual basis.
Fringe Benefit Plan
Qualified and nonqualified plans which generally meet specific statutory requirements providing benefits such as dependent care assistance, medical expense reimbursement, medical insurance, life insurance, and cafeteria plan arrangements.
Full Funding Limit
A cap on the deductible amount an employer maintaining a qualified pension plan is required or allowed to contribute for a plan year. This limit generally will affect the level of required contributions when a plan’s assets are large relative to its benefit liabilities.
Full Self Direction Plans
Those defined contribution plans under which participants are typically given the option to establish their own brokerage account, or accounts, and to direct the investments of their accounts in any offering of the brokerage. In some cases, the plan may permit other investments such as private real estate limited partnerships, participant loans, and deeds of trust.
A statement issued by the General Accounting Standards Board (GASB), which requires all public entities that provide OPEB to measure, recognize and report their OPEB expenses, expenditures and liabilities in a new manner. In particular, public entities that have been “reporting” the cost of their OPEB on a “pay as you go basis” no longer will be able to do this.
Generally refers to the General Agreement On Tariffs and Trade passed by the Congress in 1994 which opened trade with Mexico and Canada, but which also contained a handful of pension taxation changes which affect the assumptions which may be used for defined benefit plans, annuity calculations and distributions.
A deferred compensation or severance pay package for a key executive designed to take effect in the event that the executive’s employment is actually (or constructively) terminated due to a change in control or ownership of the employer.
Government Accounting Standards Board (GASB)
The independent body that establishes standards of financial accounting and reporting for state and local government entities (public entities). Public entities include: state, county, and local governments, public universities, colleges and school districts, and the multitude of related public agencies that are recognized as governmental.
Retirement or welfare benefit plans established for employees of state or local government. These plans include qualified plans under Code section 401(a) as well as unfunded plans of deferred compensation established pursuant to Code section 457. Governmental plans are not subject to Title I of ERISA.
Group Health Plan
Any plan of, or contributed to by, an employer (including a self-insured plan) to provide medical (including dental and vision) directly or through insurance, reimbursement or otherwise to employees, former employees, or their families.
An acronym of acronyms for the string of tax acts that require plan amendments. They include GATT, USERRA, SBJPA and TRA ‘97.
An acronym for acronyms. It generally refers to amendments to comply with a group of law changes, which includes the General Agreement on Tariffs and Trade (GATT), Uniformed Services Employment and Reemployment Rights Act (USERRA), Small Business Job Protection Act (SBJPA), and Tax Reform Act of 1997 (TRA ’97). The “O” may be pronounced for enthusiasm (GUST-O!).
Highly Compensated Employee (HCE)
Any employee who either (1) owned more than 5% of the company during the current or preceding year or (2) received compensation in excess of $80,000 (indexed) in the preceding year and, if the employer elects, was in the top 20% in annual compensation. Discrimination in favor of HCEs is prohibited.
A cash balance plan’s record of each participant’s “account balance” under the plan (but not a true account such as under a defined contribution plan), based on the hypothetical contributions and interest credited to the account according to the plan’s formula, and used to determine the participant’s benefits under the plan.
A self-employed person who performs services for another, but who is not a common-law employee of the person or entity receiving the services.
Individual Retirement Account (IRA)
A private pension arrangement permitted for individuals with earned income (generally income from the performance of services).
A plan wherein the benefits are integrated with Social Security benefits. Under regular corporate plans, the regulations define the percentage that is applicable to various benefits. If more than one plan is instituted for the same company, only one program may be integrated.
Integration With Social Security
A plan wherein the benefits are integrated with Social Security benefits. Under regular corporate plans, the regulations define the percentage that is applicable to various benefits. If more than one plan is instituted for the same company, only one program may be integrated.
Internal Revenue Code (Code)
The Internal Revenue Code of 1986, as amended.
The Internal Revenue Service.
IRS Determination Letter
See “Determination Letter.”
IRS EP Auditor
This refers to a special group of IRS auditors specifically trained in examining the tax compliance of various employee benefit plans.
IRS Twenty-Factor Test
A list of factors used by the IRS in determining whether a worker is an independent contractor or an employee.
A qualified retirement plan or profit sharing plan for unincorporated businesses are generally referred to as Keogh or HR-10 plans. Formerly, there were significant differences between Keoghs and plans of corporate sponsors. However, such changes have largely disappeared due to changes in the Code, reaching virtual parity in the availability of plan provisions with the exception of plan loans.
Last Day Of Plan Year Requirement
Generally refers to a defined contribution plan feature limiting allocations of contributions for a year to those participants who are employees on the last day of the plan year. Depending upon the plan design, there may be special rules which apply to participants who retire, die or become disabled during the plan year.
A method of accounting for the tax “basis” in inventory. It requires gain on sales of inventory to be measured on a “last-in-first-out” basis.
These are employees of another employer which under the rules set forth in Code section 414(n) must be treated as the employees of the company receiving their services for retirement plan and welfare plan purposes.
An employee stock ownership plan which borrows money to purchase stock and allocates shares within the plan as the loan or financing is repaid.
Limited Option Plans
There are defined contribution plans which permit participants to direct the investment of their retirement accounts from among a limited number of investment choices (usually between three and five mutual funds).
Listing Of Required Modifications (LRMs)
Generally refers to a package of sample plan provisions, published and updated periodically by the IRS, which reflects language the IRS has found to be acceptable in certain circumstances. The language is often specific in nature and will not fit all situations. Employee benefits practitioners frequently use the LRMs as a starting point in draft plan provisions for their clients (syn: “boiler plate”).
Lump Sum Distribution
A distribution of the entire balance to the credit of a participant in a profit sharing plan or a pension plan. These amounts distributed are entitled to limited 10-year averaging and 5-year averaging upon distribution and were formerly required for rollover treatment.
Maximum Payment Amount
A monetary amount that is approximately equal to the tax the IRS would collect upon plan disqualification and is equal to the sum for the open taxable years of the: (1) tax on the trust; (2) additional income tax resulting from the loss of employer deductions for plan contributions (and any interest or penalties applicable to the plan sponsor’s return); and (3) additional income tax resulting from income inclusion for participants in the plan.
Minimum Coverage Rule
Code section 410(b)’s requirement that a plan (or group of plans that may be grouped together for testing purposes) must benefit an adequate number of nonhighly compensated employees relative to the number of highly compensated employees who are benefiting under the plan.
Minimum Distribution Rules
Provisions of the Code which effectively limit the extent that a participant may defer the receipt of distributions from a retirement plan. These rules generally require distributions to begin when an employee attains age 70-1/2 and specifies a minimum amount that must be distributed in order to avoid the imposition of an excise tax. These rules are designed to ensure that benefits which may ultimately be paid to beneficiary are incidental to benefits which are payable to a client participant.
Minimum Participation Rule
Code section 401(a)(26) requirement that every plan, tested alone, must benefit at least the lesser of 50 employees or 40% of the nonexcludable employees.
Money Purchase Pension Plan
A type of defined contribution plan under which the employer’s contributions are mandatory and are usually a fixed percentage of each participant’s compensation. A participant’s benefits are equal to the amounts accumulated in the participant’s individual account.
A medical savings account, enacted with the 1996 Act and available only to 750,000 individuals who participate in high deductible medical plans thus permitting them to shelter pre-tax dollars for unreimbursed medical insurance premiums.
The person named in a plan document as the “named fiduciary” and who is liable for the plan’s operation and administration.
The Newborns Mother’s Health Protection Act of 1996.
A plan which has not been timely amended to comply with certain changes in the retirement plan laws.
Coverage, and Minimum Participation Rules,”See Anti Discrimination Rules”, “Minimum Participation Rule” and “Minimum Coverage Rule.”
Nonelective Contribution Or Employer Nonelective Contribution
Often used to describe contributions made by an employer which are not subject to a cash or deferred election under a 401(k) plan. Nonelective contributions can include regular profit sharing contributions, matching contributions and certain “fail safe” contributions made by an employer to ensure that the plan will satisfy various nondiscrimination tests.
Employees who may not be excluded from participation in their employer’s retirement plan on the basis that they have not satisfied the plan’s age, service and status requirements (e.g., age 21, “one year of service, non union”). These employees must be taken into account when testing a retirement plan under the minimum participation and minimum coverage tests.
Nonhighly Compensated Employee (NHCE)
An employee who does not meet the tests for being considered an HCE. Discrimination against NHCEs in benefits is prohibited.
An employee stock ownership plan that is funded with contributions of stock or cash without financing.
A plan other than a prototype plan.
Nonqualified Deferred Compensation Plan
A plan which does not meet the qualification requirements of the Code but which is designed to provide deferred compensation to certain employees. In nonqualified deferred compensation plans, the employer typically does not receive a tax deduction for funds set aside under a deferred compensation plan until those funds are actually received and taken into income by the participant.
A plan other than a standardized plan.
Normal Retirement Age
Normal retirement age is generally specified in a retirement plan. The participant who is not otherwise fully vested by the time he attains his normal retirement age becomes fully vested regardless of the plan’s vesting schedule. The term is also used in a retirement plan to refer to the age at which an employee first becomes eligible for a full retirement benefit that is not actuarially reduced to take into account early retirement.
The Omnibus Budget Reconciliation Act of 1993.
Open Taxable Years
This term refers to those years for which additional tax may be assessed by the Internal Revenue Service for deficiencies and penalties. A tax year will “close” after the passage of three to six years from the date the tax return for that year is filed. This is referred to the passing of the limitations period or statute of limitations for assessment.
An Operational Failure under EPCRS in the case of a qualified plan is one that arises solely from the failure to follow plan provisions. An Operational Failure under EPRSC with respect to a section 403(b) plan is a failure that would result in the loss of the exclusion allowance under section 403(b).
Other Postemployment Benefits (OPEB)
Various employee benefits that employers provide to their retirees (and, in some cases, their dependents) – other than pension benefits. These include: retiree health insurance and dental, vision, prescription, or other healthcare benefits provided to retirees and their dependents. OPEB can also include retiree life insurance, legal services and other miscellaneous benefits.
Loan by a plan to a participant usually secured by the vested account balance of the participant and which is exempt from the prohibited transaction rules.
Participant-Directed Account (PDA)
A policy of permitting plan participants to select the investment fund or funds or vehicles in which their account balance is invested. PDAs can include fully self-directed accounts which permits the participant to select virtually any investment or choose from a more limited offering of investment alternatives.
Participant-Directed Retirement Account
A retirement account over which the participant is given either full or limited investment direction (see Full Self-Direction Plans and Limited Option Plans).
Those employees who are not only eligible to participate in a plan but who have satisfied all enrollment requirements for participation.
Party In Interest
A person who is prohibited from engaging in certain transactions with a plan. A lengthy statutory definition of relationships resulting in party in interest status, which includes seemingly everyone who ever heard of the plan or of the employer or who even passed them on the street. Generally, it does not include your mother-in-law.
Pension And Welfare Benefits Administration (PWBA)
Pension and Welfare Benefits Administration is the agency within the Department of Labor which is charged with enforcing many of the provisions of ERISA.
Pension Benefit Guaranty Corporation (PBGC)
A nonprofit corporation functioning under the jurisdiction of the United States Department of Labor, charged with responsibility for insuring certain pension benefits.
Pension Protection Act of 2006 (PPA)
Federal legislation that made permanent a number of temporary, but significant, pension law changes that were originally contained in the Economic Growth and Tax Relief Reconciliation Act of 2001. The PPA also contains important new changes regarding new minimum funding rules for defined benefit pension plans, automatic enrollment of 401(k) participants and default investments under participant directed investment plans.
Introduced by TRA 1986 to replace the term integration. Integrated plans now are based on a theoretical Social Security benefit earned uniformly by all employees according to their age and compensation, other than adjusted for individual earnings histories.
Phantom Stock Plan
An incentive plan under which employees are awarded hypothetical shares of employer stock. At a specified event in the future, such as retirement or termination of employment, the employee is entitled to receive an amount measured by the fair market value of phantom shares credited to the employee’s “account.” There are many variations on this theme.
The individual or firm responsible for performing duties incidental to the maintenance of an ongoing welfare or retirement plan, such as determining eligibility for benefits, processing benefit claims, and so on. If the plan does not designate an administrator, the plan sponsor is the plan administrator.
Plan Document Failure
Under EPCRS, any plan provision (or absence of a plan provision) that violates the retirement plan qualification requirements of Code section 401(a) (in the case of a qualified retirement plan) or Code section 403(b), (in the case of a tax-sheltered annuity).
A legal concept whereby certain federal laws are deemed to supersede state laws concerning the same subject matter.
Preferred Provider Organization (PPO)
A group of hospitals and physicians that contract on a fee-for-service basis with employers, insurance companies or other third party administrators to provide comprehensive medical service. Providers exchange discounted services for increased volume. Participants’ out-of-pocket costs are usually lower than under a fee-for-service plan. Typically a PPO arrangement allows one level of coverage if an individual seeks treatment with a doctor within a PPO network of providers and a lower level of coverage if an individual uses a non-PPO doctor.
Profit Sharing Plan
A type of defined contribution plan which generally permits the employer to designate the amount of the contribution to the plan on a year-by-year basis.
Under both the Internal Revenue Code and ERISA, certain enumerated transactions, direct or indirect, between any plan and certain enumerated parties. The definitions of the transactions and relationships are pervasive and include residual categories for any direct or indirect benefit to the related party from the use of a plan’s assets.
See Anti-Cutback Rules.
A type of plan sponsored by a bank, insurance company or other financial institution consisting of a basic plan and an adoption agreement. This type of plan can be adopted by an employer simply completing the adoption agreement. Generally, the form of plan has been pre-approved by the IRS.
Prudent Expert Rule
A shorthand reference to the principal standard of fiduciary duty under ERISA which requires fiduciaries to act with the care, skill, prudence, and diligence under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.
Under EPCRS, any failure that adversely affects the qualification of a retirement plan. There are three types of qualification failures: (1) Plan Document Failures, (2) Operational Failures, and (3) Demographic Failures.
These are the requirements set forth in Code section 401(a) which a retirement plan must meet in order to be “qualified” and receive tax-favored treatment.
Qualified Domestic Relations Order (QDRO)
A court order issued under state domestic relations laws (including community property laws) that relates to the payment of child support or alimony or marital property rights from qualified retirement plan benefits payable to a participant in a qualified retirement plan and which has been determined to be a “qualified” order by the plan administrator.
Qualified Joint And Survivor Annuity (QJSA)
A required type of annuity benefit for pension plans which takes its name from the fact that periodic payments will be made over the joint lives of a married participant and his or her spouse. A QJSA must be provided (with certain exceptions) whenever a participant begins to receive benefits during his lifetime, unless the annuity option is waived with spousal consent.
Qualified Matching Contributions
In a 401(k) plan, refers to employer contributions other than employee salary deferrals and certain other nonelective contributions from the employer. Under the 401(k) plan regulations, these contributions are made to help a plan pass the actual contribution percentage test (ACP), provided certain nondiscrimination requirements are met.
Qualified Medical Child Support Order (QMCSO)
A court order that provides for child support with respect to a child of a participant under a group health plan (or health benefit coverage to such a child) that is made pursuant to a state domestic relations law (including a community property law) and that relates to benefits under an ERISA employee benefit plan which has been determined by the plan administrator to be a “qualified” order.
Qualified Nonelective Contributions
For a 401(k) plan, employer contributions other than employee salary deferral contributions and matching contributions. Under the section 401(k) regulations, these contributions are made to help a plan pass the actual deferral percentage (ADP) test, or the actual contribution percentage (ACP) test, provided certain nondiscrimination requirements are met.
Qualified Preretirement Survivor Annuity (QPSA)
A required form of annuity benefit for pension plans. The QPSA applies to distributions to a beneficiary when a participant has died before benefits had begun to be distributed. The QPSA requirement is automatic unless the participant has waived the right, with their spouse’s consent.
Qualified Retirement Plans
Retirement plans which in form and in operation meet the various qualification rules set forth in Code section 401(a), the related sections, and the regulations thereunder.
A nonqualified deferred compensation arrangement under which amounts are transferred to a trust, typically irrevocable, to be held for the benefit of one or more employees. The trust assets must be reachable by the employer’s creditors, earnings in the trust are taxed to the employer.
Retirement Equity Act of 1984.
Remedial Amendment Period
A period during which a plan may be retroactively amended to include provisions to meet the qualification requirements of Code section 401(a). The period extends until the date that the IRS issues a letter of determination for the plan if an application for a determination letter is filed on or before the due date for filing the tax return of the sponsor of the plan for the year in which the plan is adopted. A special extended remedial amendment period is usually provided in connection with significant pension law changes.
Required Minimum Distributions
Generally refers to the minimum amount that must be distributed each plan year for a plan to satisfy the minimum distribution rules.
A corporation’s accumulated profits or losses.
See Revenue Procedure.
A published policy and procedure of the IRS for processing filings and other applications for rulings and approvals by the IRS on a local and national level. They are published in the IRS’s Internal Revenue Bulletin and contain the procedural rules for transacting and dealing with the IRS on a broad range of matters.
Form of IRA created by TRA 97 from which qualified distributions are not includible in gross income or subject to the additional 10% tax on early withdrawals.
A corporation that has elected to be taxed under Subchapter S of the Code. An S corporation is generally not taxed in a manner similar to a partnership. The S corporation’s income is reported and taxed on the individual shareholder’s tax returns. There are various limitations on S corporations, including the number of shareholders that a corporation may have.
Safe Harbor Design (Plan)
A plan which contains a contribution allocation formula which meets the provisions of the nondiscrimination regulations and which is not required to pass certain discrimination tests because it complies with the IRS’s requirements in every instance by its terms.
Small Business Job Protection Act of 1996.
Self-Correction Program (SCP)
Program under the IRS’s Employee Plans Compliance Resolution System (EPCRS) that permits correction of certain plan failures without contacting the IRS. See also: “Employee Plans Compliance Resolution System; Voluntary Correction Program; and, Audit Closing Agreement Program.
SEP or SEP/IRA
A SEP or SEP/IRA is a retirement plan which minimizes administrative responsibilities by permitting an employer to make contributions in accordance with a written plan on a nondiscriminatory basis to all covered employees. Contributions are made directly to IRAs maintained for each individual employee. Each IRA will constitute a separate SEP, although its provisions may simply be those of a bank trustee’s or custodian’s standard IRA. The document under which the employer makes this contribution is referred to as the “SEP Arrangement.”
Separate Line of Business (SLOB)
A portion of a company’s overall business which can be treated, under IRS rules, as a separate employer for retirement plan purposes. A minimum of 50 employees is required for a SLOB.
An employee who works for more than one employer. For example, an office receptionist who provides reception services to several employers under an office expense sharing arrangement.
A form of IRA arrangement or a portion of a profit sharing 401(k) plan that was added to the Code by the 1996 Act, and generally replaces the availability of salary reduction simplified employee pensions (SARSEPs) which were simultaneously repealed with the 1996 Act.
Small Plan Audit Cases
Tax litigation cases currently being tried and appealed in the various Tax Court and District Courts Of Appeals resulting from an IRS program of auditing small defined benefit retirement plans of professional corporations, most notably doctors and lawyers. The IRS targeted defined benefit plans and attacked the actuarial assumptions attempting to impose a standard of reasonableness on the actuarial industry regarding retirement plans.
Stock Bonus Plan
A type of qualified defined contribution plan established and maintained by an employer to provide benefits similar to a profit sharing plan, except that benefits are generally paid in the form of the employer’s stock. An employee stock ownership plan (ESOP) may take the form in whole or in part of a stock bonus plan.
A benefit program which permits employees the opportunity to purchase employer stock at a discounted price or fixed price. Stock Options may be either “qualified” or “nonqualified” which will determine the extent of their favorable tax treatment.
Stop Loss Policy
An insurance policy purchased by a self-insured medical plan or by the sponsor of a self-insured medical plan which insures against either large individual claims or plan total aggregate claims during a specified time period. If claims exceed the stop loss insurance amount, often referred to as the stop loss trigger point, the stop loss policy will pay the remainder of the claim or reimburse the plan or the plan sponsor for this amount. Also called excess loss insurance.
A fiduciary (e.g., a trustee or plan administrator) who replaces another fiduciary.
Summary Annual Report (SAR)
A summary of the contents of an employee benefit plan’s Annual Report, Form 5500 filing. The SAR must be provided to participants within 210 days following the close of the plan fiscal year for which the Form 5500 is filed.
Summary Of Material Modifications (SMM)
A notice required under ERISA sections 102 and 104 that informs participants and beneficiaries of plan modifications and amendments and must be provided within 210 days after the end of the plan year in which the change to the plan is adopted.
Summary Plan Description (SPD)
A summary of the provisions of an employee benefit plan required by ERISA that must contain certain minimum information including participant rights under ERISA. The SPD must be written so that it is understandable to the average plan participant.
Target Benefit Plan
Contributions are based upon an actuarial valuation designed to provide a targeted benefit to each participant upon retirement. The plan does not guarantee that such benefit will be paid. Its only obligation is to pay whatever benefit can be provided by the amount in the participant’s account. A hybrid of a money purchase plan and a defined benefit plan.
Tax Qualified Status
This refers to the favorable tax status afforded qualified retirement plans. That is, the ability to take an immediate deduction for contributions to a plan while participants do not currently have taxable income. The ability to accumulate tax deferred earnings and the retirement trust, and the ability to receive favorable income tax treatment for plan distributions.
Tax Sheltered Annuity (TSA)
See 403(b) Plans
Tax-Deferred Annuities (TDAs)
See 403(b) Plan
Taxpayer Relief Act Of 1997 (TRA ‘97)
Federal tax legislation signed into law by President Clinton on August 5, 1997.
Tax Equity and Fiscal Responsibility Act of 1982.
Third Party Appraisals
Refers to appraisals of certain plan assets conducted by an appraiser who is independent of the sponsoring employer or the trustee.
Third-Party Administrator (TPA)
A company which provides record keeping functions for a retirement plan or a welfare plan under contract. A TPA oftentimes is not a deemed fiduciary of the plan but serves as an agent or contractor to the fiduciaries of the plan.
Top Hat Plan
A type of nonqualified plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.
Tax Reform Act of 1986.
The person or entity appointed to hold legal title and possession of an employee benefit plan’s assets.
The IRS’s Tax Sheltered Annuity Voluntary Correction Program. Under TVC, an employer sponsor or a tax sheltered annuity program or 403(b) plan may correct certain operational failures, demographic failures and eligibility failures with IRS approval.
Unrelated Business Income Tax (UBIT)
The tax on income derived from certain trade or business activities conducted by otherwise tax exempt entities which the Code deems to be unrelated to the tax exempt entity’s normal operations.
Uniformed Services Employment And Reemployment Rights Act of 1994 passed by Congress in 1994 which generally provides protections to uniformed servicemen for time spent in active duty, thus protecting their benefit accruals and vesting.
The schedule under which a participant’s accrued benefit or account balance under a plan becomes nonforfeitable. For example, 20% in year 1, 40% in year 2, etc.
A program under which the Service permits a plan sponsor to submit a specimen plan for approval by the IRS District Office in which it is located. For a single user fee for each type of plan submitted (i.e., profit sharing, 401(k), money purchase etc.) the plan will be approved so long as the sponsor certifies that at least 30 employers within two IRS districts are expected to adopt the plan in substantially the form approved. Upon approval by the initial IRS district, it can be subsequently submitted to any other IRS district along with the IRS opinion letter and the subsequent IRS user fees will be waived. The employer who adopts a volume submitter plan cannot rely on the approval letter from the IRS given to the sponsor, but must submit a determination letter request in the normal fashion except that the adopting employer’s user fee will be only $125 and their review process should be expedited.
Voluntary Correction Program (VCP)
Program under the IRS’s Employee Plans Compliance Resolution System (EPCRS) that permits plan sponsors to, at any time before an IRS audit, pay a limited fee and receive IRS approval for plan correction failures. See also Employee Plans Compliance Resolution System; Self-Correction Program; and, Audit Closing Agreement Program.