Pension Terms A - D
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A-Organization (A-Org): A service organization that both regularly performs services for (or is regularly associated with) a First Service Organization (FSO) and is a shareholder or owner (no matter how small) with that FSO.
Account: The assets (both vested and nonvested) held on behalf of a plan participant in a defined contribution plan. A participant may have many subaccounts due to investment choices and contribution sources; however, all of these subaccounts are collectively referred to as the participant's account.
Accrual Rate: The normal accrual rate for an individual is the increase in the participant's accrued benefit during a given measurement period, divided by the amount of service during the same measurement period, expressed as a percentage of the participant's average annual compensation.
Accrued Benefit: A benefit that an employee has earned (or accrued) through participation in the plan. In a defined contribution plan (e.g., a profit sharing plan), the accrued benefit of a participant is the balance in his or her individual account at a given time. In a defined benefit plan, the accrued benefit is determined by reference to the benefit that will be provided to a participant when he or she reaches normal retirement age as specified by the plan. The accrued benefit should not be confused, however, with the benefit (or portion thereof) that a participant has a right (nonforfeitable) to receive if he or she leaves prior to retirement. This benefit is determined by reference to the plan's vesting schedule and the years of service credited to a participant.
Accrued-to-Date Method: A method of calculating benefit and accrual rates for purposes of the general test and cross-testing using a measurement period of the current plan year and all prior plan years.
Accumulated Funding Deficiency: With respect to a multiemployer plan for any plan year, the excess of the total charges to the funding standard account over the total credits to such account.
Active Management: A portfolio management strategy that seeks to exceed the returns of a selected market index. Active managers rely on research, market forecasts, and their own judgment and experience in making investment decisions. (Compare with Index Investing.)
Actual Contribution Percentage (ACP) Test: A mathematical test that compares the employer matching contributions and after-tax voluntary contributions allocated to highly compensated employees to those of the non-highly compensated employees. The average contribution rate of the highly compensated employees cannot exceed that of the non-highly compensated employees by more than a specified percentage. Testing is generally performed using the prior-year test results for the NHCEs, unless an election has been made to test using current-year data.
Actual Deferral Percentage (ADP) Test: A special test designed to limit the extent to which elective contributions made on behalf of highly compensated employees may exceed the elective contributions made on behalf of non-highly compensated employees under a 401(k) plan.
Actuarial Assumptions: Contributions to a defined benefit plan depend upon certain assumptions made by the plan's actuary, which may include mortality, investment return, employee turnover, retirement age, and salary scale.
Actuarial Equivalence: Two different sets of values are in an actuarial equivalence when they have an equal present value under a given set of actuarial assumptions.
ADEA: Age Discrimination in Employment Act of 1967
Adjusted Gross Income (AGI): In the case of an individual, gross income minus various permissible deductions.
Advisory Letter: A letter issued by the IRS indicating its approval of a volume submitter plan.
Affiliated Service Group: Generally, an affiliated service group consists of two or more related service or management organizations, whether or not incorporated. Employees of the members of an affiliated service group are treated as employed by a single employer for plan qualification purposes.
Age: A participant's age as defined for purposes of eligibility, testing, and the availability of certain plan features. Age for eligibility purposes is equal to attained age. Age for nondiscrimination testing purposes can either be attained age, age nearest the date of determination, or age at next birthday, provided that the determination is made in a uniform fashion.
Age-Based Profit Sharing Plan: A profit sharing plan that uses both age and compensation as a basis for allocating employer contributions among plan participants.
Age 50 Catch-Up Contributions: Additional elective or IRA contributions that are permitted to individuals who have attained age 50 and who, in the case of a 401(k) plan, 403(b) plan, or 457 plan, are prevented from making contributions because of legal or plan restrictions.
Aggregation: Combining the contribution, benefits, or even account balances for purposes of coverage, nondiscrimination, or top-heavy testing. Some situations have "required" aggregation while other situations might call for "permissive" aggregation.
Aggressive Growth Fund: A mutual fund that seeks to provide maximum long-term capital growth primarily from stocks of smaller companies or narrow market segments.
Allocation Rate: The allocation rate for an individual for a given plan year equals the sum of the contributions (including forfeitures) allocated to a participant's account for a given year divided by his or her compensation. Permitted disparity may be imputed in determining the allocation rate. This rate is not limited to the current year allocation only, but could possibly be determined using the accrued-to-date method.
Alternate Payee: A spouse, former spouse, child, or other dependent of a participant who is recognized by a domestic relations order as having a right to receive all or a portion of the benefits payable under the qualified retirement plan with respect to the participant.
Ancillary Benefits: Benefits offered under a qualified retirement plan other than retirement benefits. Ancillary benefits include supplemental death benefits and disability benefits.
Annual Addition: Term used in connection with the limitation on the contributions that may be made for a participant under a defined contribution plan.
Annual Method: A method of calculating benefit and accrual rates for purposes of the general test and cross-testing. The annual method tests only the current plan year's accrual and/or contribution.
Annual Retirement Benefit: Term used in connection with the limitation on the benefit that may be paid to a participant under a defined benefit plan.
Annuity: A series of periodic payments, usually level in amount or adjusted according to some index (e.g., cost-of-living), that typically continue for the lifetime of the recipient. In contrast, an installment payment is one of a specific number of payments that will be paid whether or not the recipient lives to receive them.
Annuity Contract: For 403(b) plans, except where a custodial account is treated as an annuity contract, an annuity contract is a contract that is issued by an insurance company qualified to issue annuities in a state and that includes payments in the form of an annuity. The contract is referred as a "403(b) contract".
Annuity Starting Date (ASD): The first day of the first period for which a benefit is payable as an annuity. For benefits payable in any other form, it is the first day on which all events have occurred that entitle the participant to the benefit.
Anonymous Submission Procedure: An IRS procedure that permits a qualified plan, 403(b) plan, SEP, or SIMPLE IRA to correct qualification failures without initially identifying the plan or plan sponsor.
Anti-Alienation Rule: As a general rule, benefits provided under a qualified retirement plan may not be assigned or alienated. There are, however, exceptions to this rule.
Anti-Cutback Rule: A qualified retirement plan may not be amended to eliminate or reduce a Section 411(d)(6) protected benefit that has already accrued, unless IRS approves a request to amend the plan or the elimination or reduction satisfies certain requirements.
Anti-Kickback Rule: A provision in ERISA prohibiting a fiduciary from receiving consideration in connection with a plan transaction.
Asset Allocation: The process of deciding how investment dollars will be apportioned among available asset classes.
Asset Allocation Fund: A mutual fund that invests its assets in a wide variety of investments which may include domestic and foreign stocks and bonds, government securities, and real estate. Some asset allocation funds keep the proportions allocated among different investments relatively constant; others alter the mix as market conditions change.
Asset Class: A grouping of investment types that share similar risk and return characteristics. The three primary asset classes are stocks, bonds, and cash investments.
Audit CAP: A program under which a qualified plan negotiates a penalty with the IRS as an alternative to plan disqualification on account of plan document or operational defects identified by the IRS during a plan audit. It also covers demographic failures (i.e., failure to satisfy minimum coverage requirements), but is not available for violations relating to the diversion or misuse of plan assets. (See also EPCRS.)
Automatic Contribution Arrangement (ACA): A plan design whereby participants are automatically enrolled in a 401(k) plan at a deferral rate specified in the plan document unless they affirmatively opt out of the arrangement. A notice requirement must be met, and the plan must use a default fund that is a Qualified Default Investment Alternative (QDIA). Any state laws prohibiting or restricting the inclusion of an ACA in a 401(k) plan are preempted by ERISA.
Automatic Enrollment: See Negative Election.
Average Benefit Percentage Test (ABP Test): One of two tests necessary to determine whether a plan meets the Average Benefit Test. (See Nondiscriminatory Classification Test.)
Average Benefit Test: One of two alternative tests used for purposes of determining whether a plan meets the minimum coverage requirements. (See Ratio-Percentage Test.)
B-Organization (B-Org): An organization in which a significant portion of the organization is performing services for an A-Org or an FSO. These services must be those known to be historically performed by employees currently performing those services. In addition, at least 10 percent of the B-Org must be owned by highly compensated employees. A B-Org does not have to be a service organization.
Balanced Fund: A mutual fund that seeks to provide current income and long-term growth from a combination of stocks and bonds.
Balance Forward Accounting: See Pooled Accounting.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: Enacted on April 20, 2005. This act, which took effect on October 17, 2005, protects all retirement plan assets from creditors during bankruptcy proceedings by exempting those assets from the debtor's bankruptcy estate. An individual's bankruptcy estate will not include retirement funds to the extent that those funds are in a qualified retirement plan, SEP, SIMPLE plan, TSA, IRA, Roth IRA, or Section 457 plan. Generally, the amount of IRA assets that is protected during bankruptcy proceedings is limited to $1 million, but amounts attributable to rollovers from protected plans do not count toward the $1 million limit.
Beneficiary: A person designated by a participant or one who, by the terms of the plan, is or may be eligible for benefits under the plan if the participant dies.
Benefiting: A term critical to coverage and nondiscrimination testing. An employee is deemed to be benefiting for a year if he or she receives an allocation, accrues a benefit, or is eligible to make salary deferrals and/or receive a matching contribution under a plan.
Benefits, Rights, and Features (BRF): The provisions in a plan other than the specific amount or availability of plan benefits, including early retirement or disability benefit eligibility, optional benefit forms, early retirement subsidies, and investment options.
Bond: A type of debt instrument issued by corporations, governments, and government agencies. The issuer makes regular interest payments and promises to pay back, or redeem, the face value of the bond at a specified time called the maturity date.
Bond Fund: A mutual fund that invests primarily in bonds; generally, corporate, municipal, or U.S. government debt obligations. Bond funds usually emphasize income rather than growth.
Bonus Deferral: An election to defer taxation on a bonus payment made no later than two and one-half months following the close of the plan year. A bonus deferral is included in the ADP test. (See Actual Deferral Percentage Test (ADP Test).)
Break in Service: The DOL has set a minimum standard of 500 hours during an eligibility computation period to determine whether an individual has incurred a break in service. A break in service may affect the individual's eligibility to make future contributions or receive benefits.
Brother-Sister Controlled Group: Five or fewer people who collectively own a controlling interest of at least 80 percent of the stock or voting power of an entity, provided that the same five or fewer people have greater than 50 percent effective control, taking into account only their identical interest in each entity.
Bundled Services: A package of complete administrative and investment services provided to 401(k) plan sponsors by a single entity.
C Corporation: A regular corporation that elects to be taxed at the corporate, rather than individual, level. (See S Corporation.)
Cafeteria Plan: A plan that allows employees to choose between taxable and nontaxable benefits; also known as a Section 125 or flexible benefits plan. Typical nontaxable benefits would include health insurance, group term life, and dental benefits. Taxable benefits would always include the option to choose cash, although a taxable benefit such as auto or homeowner's insurance could be offered. A 401(k) plan may be offered as an option under a cafeteria plan.
Calendar-Year Election: An election to make a determination with respect to highly compensated employees using the calendar year that ends within the determination year as the look-back year. The calendar-year election is applicable only to plan years that are not maintained on a calendar-year basis.
Cash Balance Plan: A defined benefit plan that exhibits features of both defined benefit and defined contribution plans. The most recognizable feature of the cash balance plan is its use of a separate account for each participant. A cash balance account is established for each employee upon the employee's becoming a member of the plan. See also Hybrid Defined Benefit Plan.
Cash-or-Deferred Arrangement (CODA): Generally known as a 401(k) plan, a qualified profit sharing or stock bonus plan that allows participants to elect to receive cash or to have the employer contribute amounts on their behalf to a plan.
Cash Investments: Short-term loans to a borrower with a very high credit rating, including short-term bank certificates of deposit (CDs), money market instruments, and U.S. Treasury bills. Cash investments are usually considered to have negligible (though not zero) market and credit risk.
Catch-Up IRA Contributions: An individual who has attained age 50 by the close of the taxable year may make additional catch-up contributions to an IRA and/or a Roth IRA.
CB: Cumulative Bulletin. A government publication in which revenue rulings and other pertinent IRS pronouncements are published. The Cumulative Bulletin is published semiannually and incorporates the materials that were published weekly by IRS in its Internal Revenue Bulletins (IRBs).
CBA: A collective bargaining agreement. See Collectively Bargained Plans.
CFR: Code of Federal Regulations
Church Plan: A qualified retirement plan that is established or maintained for employees (or their beneficiaries) of a church, convention, or association of churches exempt from tax under Code Section 501. Under ERISA, the term also embraces a retirement plan or a welfare benefit plan maintained by a separate corporation established for the exclusive purpose of funding and administering church plans. Church plans fall into two general categories --electing and nonelecting.
Claims Procedure: The steps a participant must follow when making a claim for benefits or appealing for review of a denial of a benefit claim.
Closely Held Corporation: A nonpublic corporation that is owned by a small number of shareholders.
Closing Agreement: An agreement between the IRS and a plan sponsor under which the plan sponsor will pay a certain sanction amount and make certain changes to the operation and/or design of a retirement plan in order to retain the plan's tax-qualified status.
Code: The Internal Revenue Code of 1986, as amended.
Collectively Bargained Plans: Plans that provide retirement benefits under a collective bargaining agreement. Generally speaking, if more than one employer is required to contribute to the collectively bargained plan, the plan is treated as a multiemployer plan, subject to special rules. If only one employer (including affiliates) is required to contribute to the plan, however, the plan is treated in the same way that other plans that do not cover union employees are treated.
Combination Plans: Plans using two or more plans in combination to provide retirement benefits for employees and their beneficiaries. A defined contribution plan may be combined with a defined benefit pension plan or with another defined contribution plan.
Combined Group: Three or more entities where each entity is a member of a parent-subsidiary group or a brother-sister group, and at least one entity is the parent in a parent-subsidiary controlled group.
Commingled Trust Fund: A vehicle in which assets of qualified plans, generally sponsored by unrelated employers, are pooled for investment purposes. The funds are typically managed by trust departments of banking institutions. Also referred to as a common pooled trust or collective fund.
Common-Law Employee: An individual who performs services for the employer in an employment relationship; partners in a partnership and sole proprietors are not common-law employees.
Commonly Controlled Businesses: All employees of corporations that are members of a "controlled group of corporations" are treated as employed by a single employer for purposes of plan qualification. A comparable requirement applies to partnerships, sole proprietorships, and other businesses under common control. See also Controlled Group of Corporations.
Comparability Plan: Generally, a profit sharing plan in which the contribution percentage formula for one category of participants is greater than the contribution percentage formula for other categories of participants. To satisfy the nondiscrimination requirements, a comparability plan is tested under the cross-testing rules.
Compensation: The amount of a participant's taxable and nontaxable remuneration that is considered for purposes of certain employee benefit requirements.
Compensation Percentage Test: The test required if the definition of compensation for benefit purposes does not meet one of the prescribed safe harbor definitions.
Component Testing: Also known as restructuring, this is a testing method in which some of the employees of a plan are tested separately from the remaining employees in the plan. This option is available at the administrator's discretion, rather than from any of the desegregation rules required under the regulations.
Contributory Plan: A pension plan under which employee contributions are required as a condition of participation.
Controlled Group of Corporations: There are three types of controlled groups: (1) the parent-subsidiary controlled group, (2) the brother-sister controlled group, and (3) the combined group. Two tests must be met to have a "parent-subsidiary" controlled group: (1) stock equal to 80 percent of the combined voting power of each corporation, or at least 80 percent of the value of all outstanding stock of each corporation, is owned by one or more of the corporations of the group, and (2) the common parent corporation owns at least 80 percent of the voting power or value of at least one of the corporations in the group. Two tests must be met to have a "brother-sister" controlled group: (1) five or fewer persons (individuals, estates, or trusts) own at least 80 percent of the combined voting power or value of two or more corporations, and (2) taking into account the ownership of each stockholder only to the extent that it is identical in each of the corporations involved, the five or fewer persons own more than 50 percent of the combined voting power or value of the corporations involved. A "combined group" is a group of two or more corporations if: (1) each corporation is a member of either a parent-subsidiary group or a brother-sister group, and (2) at least one of the corporations is the common parent of a parent-subsidiary group and also is a member of a brother-sister controlled group. All employees of corporations that are members of a controlled group of corporations are treated as employed by a single employer for plan qualification purposes.
Correction on Audit (Audit CAP): An IRS program that enables a plan sponsor to negotiate a monetary sanction if a qualification failure is identified during an examination and corrected, without plan disqualification.
Corrective Distribution: A mechanism for distributing excess deferrals, excess contributions, and excess aggregate contributions in order to satisfy statutory limits or ADP and ACP tests. Corrective distributions provide a fail-safe mechanism for a plan to avoid disqualification.
Cost Recovery: A method for a participant to recoup previously taxed amounts from a qualified plan.
Credit Risk: The possibility that a bond issuer will default; that is, fail to repay principal or interest to a bond holder in a timely manner or at all. Also known as default risk. (Compare to Market Risk.)
Cross-Testing: A qualified retirement plan may not discriminate in favor of highly compensated employees with respect to the amount of contributions or benefits. Whether a defined contribution plan satisfies this requirement is generally determined with respect to the amount of contributions. As an alternative, however, a defined contribution plan (other than an ESOP) may be tested with respect to the equivalent amount of benefits. Similarly, whether a defined benefit plan satisfies this requirement is generally determined with respect to the amount of benefits. As an alternative, however, a defined benefit plan may be tested with respect to the equivalent amount of contributions.
Cumulative List: The annual list of changes required by IRS to be reflected in the following year's opinion, advisory, or determination letter submissions. No reliance can be provided for changes in a plan that are not included in the applicable Cumulative List.
Current Availability: A standard used to test a benefit, right, or feature for nondiscrimination. The current availability test is generally satisfied if, under the terms of the plan document, the option's availability to non-highly compensated employees satisfies the Section 410(b) coverage test.
Current-year Method: The method of performing the ADP and ACP tests using the current plan-year contribution for the NHCEs. If a plan uses the current-year testing methodology, it must formally elect to do so in the plan document.
Curtailments: The reduction of benefits or the augmenting of eligibility requirements so as to amount to a partial or a complete termination of the plan.
Custodial Account: Treated as an annuity contract for purposes of the 403(b) plan rules. A custodial account is a plan, or a separate account under a plan, in which an amount attributable to 403(b) plan contributions is invested in stock of a regulated investment account (i.e., mutual funds).
Daily Valuation: A system of accounting that provides for the allocation of earnings and losses to a participant's account on a daily basis.
DB: defined benefit
DC: defined contribution
Death Benefits: Payments to a beneficiary of a deceased participant that may be provided under a qualified retirement plan, but they must be incidental to the retirement benefits, which are the major purpose of the plan.
Deemed IRA: A qualified retirement plan or 403(b) plan may permit employees to make voluntary employee contributions to a separate account or annuity that (1) is established under the plan and (2) meets the requirements applicable to either IRAs or Roth IRAs. In such event, the separate account or annuity will be deemed an IRA or a Roth IRA, as applicable, for all purposes of the Code.
Deferral Contribution: See Elective Deferral (Contributions).
Deferred Retirement Option Plan (DROP): A design feature within a defined benefit plan in which employees are encouraged to continue employment with defined contribution-like deposits.
Deficit Reduction Act of 1984 (DEFRA): An act of Congress passed to reduce the budget deficit. A portion of this bill contained the Tax Reform Act of 1984.
Deficit Reduction Act of 2005: Enacted on February 8, 2006. This act increased the single-employer flat rate premium to $30 per participant and the multiemployer plan flat-rate premium to $8. For each plan year beginning in a calendar year after 2006, the flat rate premiums will be indexed to the national average wage index. This act also contained a new premium for certain single-employer plans that are terminated (generally, situations where PBGC takes over as trustee of the terminated plan).
Defined Benefit Plan: A plan that is designed to provide participants with a definite benefit at retirement (e.g., a monthly benefit of 20 percent of compensation upon reaching age 65). Contributions under the plan are determined by reference to the benefits provided, not on the basis of a percentage of compensation.
Defined Benefit Excess Plan: A defined benefit plan under which the rate at which benefits are determined with respect to compensation above a specified level is greater than the rate with respect to compensation at or below the specified level. See also Permitted Disparity.
Defined Benefit Offset Plan: A defined benefit plan that provides that each participant's benefit is reduced by a specified percentage of the participant's compensation up to the offset level. See also Permitted Disparity.
Defined Contribution Plan: A plan that provides an individual account for each participant and in which benefits are based solely upon the amount contributed to the account (plus or minus any income, expenses, gain, losses, and forfeitures allocated to the account).
Defined Contribution Excess Plan: A defined contribution plan under which the rate at which contributions are allocated with respect to compensation above a specified level is greater than the rate at which contributions are allocated with respect to compensation at or below the specified level. See also Permitted Disparity.
Delinquent Filer Voluntary Compliance Program (DFVC): A program established by DOL to encourage, through the assessment of reduced civil penalties, delinquent plan administrators to comply with the annual reporting requirements.
Demographic Failure: A failure of the minimum participation test, minimum coverage test, or nondiscrimination test. A demographic failure generally must be corrected within nine and one-half months of plan year-end. If it is not, the correction program must be used.
Department of Labor (DOL): One of the government agencies responsible for the enforcement of ERISA.
Designated Beneficiary: For required minimum distribution purposes, an individual who is designated as a beneficiary under the plan. An individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan provides, by an affirmative election by the employee (or the employee's surviving spouse) specifying the beneficiary.
Designated Roth Contribution: A 401(k) plan and a 403(b) plan are permitted to include provisions that enable an employee to elect to have all or a portion of the employee's elective deferrals under the plan treated as designated Roth contributions. Designated Roth contributions are elective deferrals that the employee designates as not excludable from the employee's gross income.
Determination Letter: Letter issued by the IRS District Director's office determining that a plan submitted to it either meets or does not meet the requirements for qualification.
Determination Year: The 12-month period coincident with the plan year used to determine highly compensated employees.
DFVC: See Delinquent Filer Voluntary Compliance Program.
Directed Investments: The right of a participant to make an election with respect to the investment of his or her account balance in a defined contribution plan.
Direct Rollover: A distribution to an employee made in the form of a direct trustee-to-trustee transfer from a qualified retirement plan to an eligible retirement plan.
Discretionary Contributions: Any employer contributions to a 401(k) or profit sharing plan that are not mandated by the terms of the plan.
Discretionary Formula Plan: A profit sharing plan that provides that the amount of each year's contribution will be determined by the board of directors (or the responsible official(s)) of the sponsoring employer, in its discretion. (Contributions must be "recurring and substantial" to keep the plan in a qualified status.)
Discretionary Nonelective Contribution: Employer contributions to a 401(k) plan that are not tied to elective contributions; also known as profit sharing contributions or simply employer contributions.
Discrimination: A situation in which a plan, through its provisions or through its operations, favors officers, shareholders, or highly compensated employees to the detriment of other employees.
Disqualification: Loss of qualified (tax-favored) status by a plan, generally resulting from operation of the plan in a manner that is contrary to the provisions of the plan or that discriminates against rank-and-file employees. See also Discrimination.
Disqualified Persons: See Party in Interest.
Distress Termination: The termination of a single-employer defined benefit plan covered by PBGC that is unable to pay all its benefit liabilities.
Diversification: A strategy for investing in different asset classes to reduce the risks inherent in investing in a single class.
Domestic Relations Order (DRO): A judgment, decree, or order (including approval of a property settlement agreement) made pursuant to a state domestic relations law (including a community property law) that relates to the provision of child support, alimony payments, or marital property rights to an alternate payee.
