Pension Terms E - H
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EACA: See Eligible Automatic Contribution Arrangement.
Early Retirement Window (ERW): An early retirement that is offered to certain participants for a limited period of time.
Early Withdrawal Penalty: A 10 percent penalty (in addition to ordinary income taxes owed) on money withdrawn from a tax-advantaged retirement plan before age 591/2 . The penalty does not apply in special circumstances such as death, disability, or withdrawals in the form of an annuity or payment over the recipient's (and spouse's) life expectancy.
Earned Income: The net earnings from self-employment in a trade or business in which personal services of the taxpayer are a material income-producing factor. Earned income is the criterion for contributions to a qualified retirement plan on behalf of a self-employed individual.
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001): Enacted on June 7, 2001. This act raised contribution limits on IRAs and qualified retirement plans, liberalized portability and vesting rules, and made a host of changes affecting qualified retirement plans.
EEOC: Equal Employment Opportunity Commission
Effective Accrual Rate (EAR) or Equivalent Benefit Accrual Rate (EBAR): A contribution that is expressed in the form of a theoretical benefit as a percentage of pay rather than as an allocation percentage of pay.
Effective Availability: A facts-and-circumstances determination as to whether the availability of a benefit, right, or feature substantially favors highly compensated employees.
Effective Control: Ownership of more than 50 percent of the total combined voting power of all classes of stock entitled to vote or of more than 50 percent of the total value of all classes of stock of the corporation or, in the case of a partnership, the ownership of more than 50 percent of the capital interest of the partnership. In the case of a sole proprietorship, ownership of 100 percent of the entity. In the case of an estate or trust, ownership.
Effective Interest Rate: is the single interest rate that would produce the same funding target as the funding target produced using the segment rate. This rate is used for crediting interest on contribution requirement from plan year end to date contribution is deposited and is also used in determining the pre-funding balance. [IRC § 430(h)(2)(A)]
EIAA: See Eligible Investment Advice Arrangement.
EIN: employer identification number
EITF: Emerging Issues Task Force
EFAST: See ERISA Filing Acceptance System.
Elective Contribution: A contribution made to a 401(k) plan or a 403(b) plan by the employer on an employee's behalf pursuant to the employee's cash-or-deferred election.
Elective Deferral: See Elective Contribution.
Elective Deferral Catch-Up Contributions: An individual who participates in a 401(k) plan or in a 403(b) plan, who has attained age 50 by the end of the year, and for whom no other elective deferrals may otherwise be made for the year because of the application of any other limitation may be able to make additional elective deferrals (i.e., catch-up contributions) for that year.
Elective Transfer: Process under which an employee, under certain circumstances, can direct the transfer of his or her account balance from one plan to another. Unlike direct rollovers, elective transfers are not considered distributions.
Eligibility: The terms and conditions relating to the ability of an employee to participate in a plan. Common eligibility conditions include a minimum age, minimum service, employee classification and/or division, or location.
Eligible Automatic Contribution Arrangement (EACA): An automatic contribution arrangement (ACA) under which a participant may withdraw, during a limited period of time, deferrals made pursuant to the ACA. An EACA also provides a 401(k) plan additional time to refund excess contributions and excess aggregate contributions.
Eligible Employee: Any employee who is eligible to become a participant in the plan pursuant to the terms of the plan document.
Eligible Investment Advice Arrangement (EIAA): An arrangement created by the Pension Protection Act of 2006 whereby participants can receive fiduciary-level investment advice, financial advisors can receive fees from the funds they are providing advice on without violating ERISA's prohibited transaction rules, and plan sponsors or other hiring fiduciaries can be relieved of fiduciary liability for the individual advice given to participants. Numerous requirements apply.
Eligible Retirement Plan: An IRA, a qualified retirement plan, a 403(b) plan, and/or a governmental Section 457 plan.
Eligible Rollover Distribution: A distribution from a qualified retirement plan that may be rolled over to an eligible retirement plan.
Employee: An individual who provides services for compensation to an employer and whose duties are under the control of the employer.
Employee Benefits Security Administration (EBSA): A division of the Department of Labor that monitors compliance with ERISA and the Code with respect to employee benefit matters. (Formerly the Pension and Welfare Benefit Administration (PWBA).)
Employee Contributions: See Mandatory Employee Contributions and Voluntary Contributions.
Employee-Directed Plan: A plan that permits employees to direct the investment of their account balances.
Employee Plans Compliance Resolution System (EPCRS): A comprehensive system of correction programs implemented by IRS that are intended to correct qualification failures with respect to qualified plans, 403(b) plans, SEPs, and SIMPLE IRAs without plan disqualification. See also Anonymous Submission Procedure, Audit CAP, Group Submissions, SCP, and VCP.
Employee Retirement Income Security Act of 1974 (ERISA): An act of Congress encompassing both Internal Revenue Code provisions, which determine when a plan is tax qualified, and Department of Labor provisions, which govern the rights of participants and beneficiaries and the obligations of plan fiduciaries.
Employee Stock Ownership Plan (ESOP): A profit sharing, stock bonus, or money purchase pension plan, the funds of which must be invested primarily in employer company stock. Unlike other plans, an ESOP may borrow from the employer or use the employer's credit to acquire company stock. See also Stock Bonus Plan.
Employer: The entity employing an employee. The definition of employer may include entities under common control.
Employer Contribution: See Discretionary Nonelective Contribution.
Employer Securities: For an ESOP, common stock issued by the employer that is readily tradable on an established securities market. If the employer has no readily tradable common stock, employer securities include employer-issued common stock that has a combination of voting power and dividend rights at least the equal of the class of common stock with the greatest voting power and the class of common stock with the greatest dividend rights. Noncallable preferred stock that is convertible into common stock that meets the requirements of employer securities also qualifies if the conversion price is reasonable.
Employer-Sponsored IRA: An IRA that is sponsored by the employer for purposes of helping its employees make a tax-deductible contribution to an IRA and to invest the funds in a particular type of investment. The employer-sponsored IRA should be distinguished from a simplified employee pension plan (SEP), which requires employer contributions and must meet certain requirements with respect to participation, discrimination, withdrawals, and contributions.
Enrolled Actuary: A person who performs actuarial services for a defined benefit plan. His or her services include making a determination of how much has to be contributed to the plan each year to provide the stated benefits at retirement, and the preparation of a statement that has to be filed with the plan's annual return to IRS. Actuaries who perform these services are enrolled with the Joint Board for the Enrollment of Actuaries.
Entry Date: An employee who meets a plan's eligibility requirements (age, service, and eligible classification) must actually enter the plan no later than the earlier of: (1) The first day of the plan year beginning after the date an employee meets the plan's eligibility requirements; or (2) Six months after the date he or she meets this requirement.
EPCRS: See Employee Plans Compliance Resolution System.
ERISA: Employee Retirement Income Security Act of 1974. The basic law covering qualified retirement plans and incorporates both the pertinent Internal Revenue Code provisions and labor law provisions. ERISA is designed to protect the rights of beneficiaries of employee benefit plans offered by employers, unions, and the like. Additionally, ERISA imposes various qualification standards and fiduciary responsibilities on both welfare benefit and retirement plans, and provides enforcement procedures as well. In the retirement area, it also provides standards for tax qualification.
ERISA Filing Acceptance System: DOL's computerized system designed to process the annual Form 5500 series return/report.
ERISA Spending Account: A mechanism for using payments received from mutual funds to cover a broad array of plan expenses. In some situations, a bookkeeping account is set up independent of the plan trust to collect mutual fund revenues to pay plan expenses at the direction of a plan fiduciary. In others, mutual fund revenue is held in an account within the plan trust from which plan expenses are paid.
Excess Aggregate Contributions: The excess of the aggregate amount of employee contributions and matching contributions made on behalf of highly compensated employees for a plan year over the maximum amount of such contributions permitted under the ACP test.
Excess Contribution: The excess of the elective contributions (including qualified nonelective and matching contributions that are treated as elective contributions) made to a 401(k) plan on behalf of highly compensated employees for the plan year over the maximum amount of such contributions permitted under the ADP test for such plan year.
Excess Deferral: An employee's elective contributions for the taxable year in excess of $15,000 (increased for inflation).
Excise Tax: A nondeductible tax imposed on the occurrence of an event.
Excludable Employee: An employee who does not need to be counted when performing a test on the plan.
Exclusion Allowance: A test that was applied to Section 403(b) plans with respect to cumulative contributions until it was repealed by EGTRRA.
Exclusive Benefit Rule: A qualified retirement plan must prohibit the use or diversion of funds for purposes other than the exclusive benefit of employees or their beneficiaries. Plan fiduciaries must discharge their duties solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits to participants and beneficiaries and paying administration expenses. See also Fiduciary.
Extended Wear-Away: A method of partitioning off various benefit formulas as of the fresh-start date. Under this method, a participant's accrued benefit is equal to the greater of the participant's accrued benefit determined under the formula without any wear-away or, if greater, the participant's accrued benefit computed under the formula as applied to total years of service taken into account under the benefit formula.
Family Attribution: Rules attributing ownership of a company from an owner to a member of the owner's family for purposes of determining controlled groups, highly compensated employees, and key employees
FAS: Financial Accounting Standards
FAS 87: Statement of Financial Accounting Standards No. 87
FASB: Financial Accounting Standards Board. The body that sets uniform standards for treatment of accounting items. In the employee benefits context, FASB has prepared an exposure draft concerning disclosure of unfunded benefit liabilities.
FASB 87: The statement issued by FASB regarding employers' accounting for pensions.
Favorable Letter: A determination letter, opinion letter, or notification letter that can be relied on in order to take advantage of certain IRS correction programs.
Federal Insurance Contributions Act (FICA): An act of Congress requiring employers and employees to pay into a federal fund that provides for retirement and welfare benefits.
Fed. Reg.: Federal Register
Federal Unemployment Tax Act (FUTA): An act of Congress that imposes a tax on employers to fund cash benefits to former employees undergoing temporary periods of unemployment.
Fee-Sharing Arrangement: A practice in which mutual funds offer fees to service providers that provide services to defined contribution plans.
Fiduciary: Any person who exercises discretionary authority or control over the management or disposition of plan assets or who gives investment advice to the plan for a fee or other compensation.
Field Service Advice (FSA): Advice issued by IRS Office of Chief Counsel or Office of Associate Chief Counsel. Field Service Advice is not binding on IRS examination or appeals officers and is not a final case determination. Field Service Advice issued to IRS examination or appeals officers is advisory only and does not resolve an IRS position on an issue or provide the final basis for closing a case and is not to be relied upon or otherwise cited as precedent.
FMLA: Family and Medical Leave Act of 1993
Final Average Compensation: The average of the employee's annual Section 414(s) compensation. The amount must not exceed the applicable taxable wage base in effect for a plan year averaged over the three-consecutive-year period ending with (or within) the plan year, or, if shorter, the employee's total period of employment.
First Service Organization (FSO): An organization whose principal business is the performance of a professional service in a particular field, such as dentistry, actuarial, or architectural services.
Fiscal year: A 12-month period used for accounting purposes.
5 Percent Owner: Any person who owns, directly or indirectly, more than 5 percent of the stock of the employer. If the employer is not a corporation, the ownership test is applied to the person's capital or profits interest in the employer. See also Key Employee and Top-Heavy Plan.
Fixed-Income Fund: A mutual fund with the objective of providing current income, primarily from fixed-income securities or bonds.
Floor Plan: A defined benefit plan that provides a minimum level of benefits for all participants in conjunction with a defined contribution plan.
Forfeitures: The benefits that a participant loses if he or she terminates employment before becoming eligible for full retirement benefits under the plan. For example, a participant who leaves the service of an employer at a time when he or she will receive only 60 percent of benefits forfeits the remaining 40 percent.
Former Employee: An individual who has ceased to be an employee of the employer.
Former Key Employee: An employee who has ceased to be a key employee of the employer. The account balances or accrued benefits of former key employees are disregarded when determining a plan's top-heavy status.
401(k) Plan: An arrangement (defined by Section 401(k)) under which a covered employee can elect to defer income by making pretax contributions to a profit sharing or stock bonus plan. A cafeteria plan may provide a 401(k) plan as a qualified benefit option.
402(f) Notice: A written explanation of the tax effects of a distribution from a qualified retirement plan that must be provided to a recipient.
403(b) Plan: A special type of deferred compensation arrangement that is available only to employees of tax-exempt organizations described in Section 501(c)(3) or employees of public schools.
414 Compensation: Compensation used for purposes of coverage and nondiscrimination testing.
415 Compensation: Compensation used for purposes of applying the applicable Section 415 limit and for the determination of highly compensated employees as well as for top-heavy purposes.
Fresh-Start Adjustment: An adjustment that is permitted to prevent a plan from violating the nondiscrimination requirements under a benefit formula or accrual method that differs from the benefit formula and accrual method used to determine benefit accruals in plan years beginning after the fresh-start date.
Frozen Plan: A qualified pension or profit sharing plan that continues to exist even though employer contributions have been discontinued and benefits are no longer accrued by participants. The plan is "frozen" for purposes of distribution of benefits under the terms of the plan.
FTAP: Funding target attainment percentage is the value of plan assets (as defined under Code Section 430(f)(4)(B))expressed as a percentage of the funding target (without adjustment for at-risk status). [IRC § 430(d)(2)] There is a phase-in of this FTAP over three years. The FTAP is 92 percent for 2008, 94 percent for 2009, 96 percent for 2010, and 100 percent for 2011. [IRC § 430(c)(5)] If a plan falls below the applicable percentage in any year, it will lose the transition relief and must determine the funding shortfall based on an FTAP of 100 percent. In addition, if a plan is subject to the deficit reduction contribution (DRC) requirement in 2007, it is ineligible for this phase-in. Adjusted funding target attainment percentage is the regular FTAP, adjusted by adding back in value of any annuities purchased by the plan for non-highly compensated participants during the past two years. In addition, it is determined by adding in, as an asset, any security provided by the plan sponsor. [IRC § 436(i)(2)] At-risk means that a plan’s FTAP for the preceding year is less than 80 percent and the FTAP for the preceding year using the additional actuarial assumptions (but not the loading factor) is less than 70 percent. There is a phase-in to the 80 percent number where for 2008 it is lowered to 65 percent, for 2009 it is 70 percent, for 2010 it is 75 percent, and then for 2011 and thereafter it is 80 percent. [IRC § 430(i)(4)] Any plan with fewer than 500 participants on each day of the preceding plan year shall automatically be deemed to not be at-risk.
Funding Shortfall: is equal to the excess (if any) of the applicable percent of the funding target over the assets (defined under Code Section 430(f)(4)(B) as the actuarial value of assets reduced by any pre-funding balances and funding standard account carryover balance). [IRC § 430(c)(4]
Funding Standard Account: Each multiemployer pension plan subject to the minimum funding standards must maintain a funding standard account, which is a device used to ease the administration of the funding rules by keeping track of the plan's charges and credits.
Funding Target: is equal to the present value of all benefit liabilities accrued at the beginning of the plan year. [IRC § 430(d)(1)] For at-risk plans, the funding target is determined using the additional actuarial assumptions and, if the plan has also been at-risk for two out of the last four years, a loading factor. [IRC § 430(i)(1)] In no event will the at-risk funding target be less than the regular funding target. There is a transition allowed for plans that have been in at-risk status for less than five years where a certain percentage of the deficiency is allowed to be added back in when determining the funding target based on the number of consecutive years the plan has been in at risk status. [IRC § 430(i)(5)]
GATT: The General Agreement on Tariffs and Trade, part of the Uruguay Round Agreements Act.
Gateway Allocation: The lesser of one-third the allocation rate provided to an HCE or 5 percent of the Section 415 compensation contribution threshold that must be contributed on behalf of all benefiting NHCEs in order to test a defined contribution plan on a cross-tested basis using rate-group testing under the general test. The 5 percent rate is increased to 7.5 percent for combination defined benefit/defined contribution plans.
GCM: General Counsel Memorandum
General Test: A mathematical test designed to prove that benefits and/or contributions provided under a plan are nondiscriminatory.
Global Fund: A mutual fund that invests in both U.S. and non-U.S. securities.
Government Plan: A plan maintained by a state or local government.
Gross Benefit Percentage: The rate at which employer-provided benefits are determined under an offset plan (before application of the offset) with respect to an employee's average annual compensation.
Group Submission: A special procedure that permits an eligible organization to voluntarily correct a failure in a qualified plan, 403(b) plan, SEP, or SIMPLE IRA resulting from a systemic error that affects at least 20 plans.
Growth and Income Fund: A mutual fund whose aim is to provide a balance of long-term growth and current dividend income from investing mainly in stocks of large and medium-sized companies.
Growth Fund: A mutual fund whose main objective is long-term growth in capital from investing primarily in growth stocks. (See Growth Stocks.)
Growth Stocks: The stocks of companies that have experienced or are expected to experience rapid growth in revenue or earnings and are expected to continue such growth for an extended period. Such stocks typically have relatively low dividend yields and sell at relatively high prices in relation to their earnings and book value. A mutual fund that emphasizes growth stocks is called a growth fund.
Gulf Opportunity Zone Act of 2005: Enacted on December 21, 2005. This act codified and expanded the pension-related relief provided by KETRA to include victims of Hurricanes Rita and Wilma.
Guaranteed Investment Contract (GIC): A contract sold by an insurance company that guarantees payment of interest on the amount invested for a particular duration.
GUST: An acronym applied to the five laws GATT, USERRA, SBJPA, and TRA '97.
Hardship Withdrawal: An in-service withdrawal from a 401(k) plan because of the immediate and heavy financial need of a participant that cannot be satisfied from other resources. The conditions for a hardship withdrawal of elective contributions can be determined through either a safe harbor or a facts-and-circumstances method.
Health Insurance Portability and Accountability Act of 1996 (HIPAA '96): Enacted on August 21, 1996. This act provided that distributions from IRAs made after 1996 will not be subject to the 10 percent penalty tax on early withdrawals if the amounts are used to pay medical expenses in excess of 71/2 percent of adjusted gross income. In addition, the 10 percent penalty tax will not apply to IRA distributions that are used by certain unemployed, formerly unemployed, or self-employed individuals to pay health insurance premiums.
Heroes Earned Retirement Opportunities Act (HERO): Enacted on May 29, 2006. For taxable years beginning on or after January 1, 2004, members of the armed forces may treat combat pay as compensation for purposes of the IRA contribution and deduction rules.
Highly Compensated Employee (HCE): An employee who: (1) during the year or the preceding year is (or was) a 5 percent owner or (2) during the preceding year received compensation in excess of $80,000 (adjusted for cost-of-living increases) and was a member of the top-paid group of employees (if the employer elects).
Highly Paid Former Employee: An employee who was a highly compensated employee at the time he or she separated from service or in any year subsequent to his or her attainment of age 55.
H.R. 10 Plan: See Keogh Plan.
Hour of Service: An hour for which a participant is paid or entitled to payment from his or her employer in an employment relationship.
Hybrid Defined Benefit Plan: A plan that is either a lump-sum based plan or a plan that has a similar effect to a lump sum based plan. A lump-sum based plan is a defined benefit plan under the terms of which the accumulated benefit of a participant is expressed as the balance of a hypothetical account balance or accumulated percentage. See also Cash Balance Plan.
