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Glossary

 

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1,000 Hour Rule

In general, an employee will be given credit for a year of service either for benefir 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.

1996 Act

Generally, this refers to the provisions of the Small Business Job Protection Act (SBJPA), the Health Insurance Portability and Accountability Act (HIPAA), and the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), which were passed in a flurry of activity just prior to the 1996 summer recess of the Congress on August 2, 1996.

204(h) Notice

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, after the amendment has been adopted but at least fifteen days before it is to take effect.  Failure to give the proper notice can render the amendment null and void!

401(k) Plan

A subtype 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.

403(b) Plan

A plan sponsored by a 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.

404(c), 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.

409A

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.

415(b) Limit

The Code’s limit on maximum benefits payable to a participant from a defined benefit pension plan.

415(c) Limit

The maximum amount that may be contributed for a participant to a defined contribution plan on an annual basis.

415(e) Limit

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.

457 Plan

A deferred compensation plan for a state or local government entity and certain tax-exempt organizations. If the plan is for a government employer, it generally will be exempt from Title I of ERISA. 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.

A

Actual Contribution Percentage Test

A test applicable to 401(k) plans and other plans with employer matching contributions (and employe 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.

Actuarial Assumption

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.

Annuity Payments

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.

Anti-Cutback Rule

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."

Antidiscrimination Rules

These are the rules under Code section 401(a)(4) which prohibit certain types of discrimination under a qualified retirement plan in favor of highly compensated employees.

Attribution Rules

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.

B

Benefit Accruals

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.

C

Cafeteria 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 account balances are credited with a predetermined rate of return and converted to a monthly pension benefit at retirement.

Church Plan

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.

Class Exemption

A published category of transactions that the DOL will consider exempt from the prohibited transaction rules. All transactions, plans, and parties in interest that fall in 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 and/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.

COBRA

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.

Code

The Internal Revenue Code of 1986, as amended.

Co-fiduciary

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.

Committee Reports

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.

Compliance Audit

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.

Conduit IRA

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.

Contribution Credit

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.

Controlled Group

Multiple employers with a sufficient degree of common ownership which 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, whether or not incorporated, using similar principles of common ownership.

CRIT/CRAT/CRUT

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.

Cross-Tested Plans

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.)

D

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.

Deemed Distribution

A term recently 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). A deemed distribution is a taxable event for the plan participant upon default of a plan loan.

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.

DEFRA

The Deficit Reduction Act of 1984.

Demographic Failure

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 Department of Labor which 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)

Dependent Care Assistance Programs (DCAPs) 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.

Determination Letter

A letter issued by the Internal Revenue Service 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 necessary or 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.

Directed Trustee

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 are not responsible for investment performance.

Disqualification

Loss of tax favored or qualified status for a retirement plan. Disqualification is generally viewed as being in the discretion of the Internal Revenue Service based upon either a failure of the plan’s terms or the operation of the plan.

Disqualifying Provision

A plan provision violating the qualification rules and resulting in disqualification of the plan.

Dividend

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.

DQ

To disqualify a retirement plan; that is, to cause the plan to lose its income tax qualified status under the Code.

E

Education IRA

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."

Eligible Employee

An employee who has met the eligibility requirements set forth in a retirement plan.

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 prograrms, 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.

Employer Securities

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.

EPCRS

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).

ERISA

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 fiduciary from engaging in certain transactions.

ESOP

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.

Excess Contributions

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.

Exempt Loan

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.

F

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.

Fiduciaries

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.

First-In-First-Out (FIFO)

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 reimburseable expenses such as child care.

Forfeitable Benefits

The portion of a participant’s benefits under a plan which are not yet vested.

Form 1099-R

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.

Form 5500

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.

Form 945

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 partneships, participant loans, and deeds of trust.

G

GASB 45

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.

GATT

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.

Golden Parachute

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.

Governmental Plans

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.

GUST

An acronym of acronyms for the string of tax acts that require plan amendments. They include GATT, USERRA, SBJPA and TRA ‘97.

GUSTO

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), The Uniformed Services Employment and Reemployment Rights Act (USERRA), the Small Business Job Protection Act (SBJPA), and the Tax Reform Act of 1997 (TRA '97).  The "O" may be pronounced for enthusiasm (GUST-O!).

H

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.

Hypothetical Account

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.

I

Independent Contractor

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