PENSION EDUCATOR SERIES GLOSSARY

Transcription

1 PENSION EDUCATOR SERIES GLOSSARY

2 2 1% Owner An employee who owns more than 1% of the outstanding stock or more than 1% of the total combined voting power of all stock in a corporation; or more than 1% of the capital or profits interest of a unincorporated business. A 1% owner who earns more than $150,000 in the determination year is a key employee for top-heavy testing purposes. With respect to employees who are more than 1% owners, the Constructive Ownership or Attribution rules apply Hour Method A procedure for crediting service based upon the number of hours of service that an employee completes during a 12-month computation period. Credit for a year of service is usually given when an employee completes 1000 hours of service during a 12-month computation period. See Year of Service. 125% Test One of two alternative tests of the ADP test or the ACP test that limits the actual deferral percentage (ADP) of the group of highly compensated employees (HCEs) in the ADP test (and/or the actual contribution percentage (ACP) of the group of highly compensated employees (HCEs) in the ACP test) to 125% of the ADP (or ACP) of the group of non-highly compensated employees (NHCEs). 3% Method One of the three accrual methods for DB plans. Under this method, benefits must accrue at a minimum rate of 3% for each year an employee is a participant in the plan. 401(a)(26) Participation Test The Code Section 401(a)(26) participation test with which most DB plans must comply. See Participation Test. 401(a)(4) Nondiscrimination Test Code Section 401(a)(4) prohibits qualified retirement plans from discriminating in favor of highly compensated employees. Under 401(a) (4) Regulations, the contributions or benefits provided by a plan cannot discriminate in favor of highly compensated employees. See Discrimination. 401(k) Plan A type of profit sharing plan that has a cash or deferred arrangement (CODA), usually through salary deferrals /3% Rule One of the three accrual methods for DB plans. Under this method, the annual rate of accrual for any year cannot be more than 133-1/3% of the rate of accrual for any prior year. 1-Year Holdout Rule A rule that is contained in some plan documents, which concerns the timing of plan participation and the recognition of prior service of a reemployed employee. Under the 1-Year Holdout Rule, an employee s years of service prior to a break in service are disregarded until the employee returns to employment with the employer and completes a new year of service. If a former participant completes a year of service after his or her reemployment date, then prior service counts and the former participant must retroactively participate in the plan back to his or her reemployment date. The 1-Year Holdout Rule cannot be used in a 401(k) plan, since a reemployed participant cannot retroactively make salary deferrals. 402(g) Limit An overall maximum limit on how much an individual can defer during a calendar year into all traditional 401(k), 403(b) and SARSEP plans, from Code Section 402(g). The 402 (g) limit also includes salary deferrals into all SIMPLE 401(k) plans and SIMPLE IRAs, but is separate from the limit on salary deferrals into all 457 plans (known as the 457 Deferral Limit). The 402(g) limit for elective deferrals is $16,500 for After 2011, the $16,500 limit may be adjusted for cost-of-living increases. See SIMPLE Deferral Limit. 403(b) Plan A special type of retirement arrangement for employees of public educational organizations and certain tax-exempt entities (known as Qualified Employers). A Code Section 403(b) plan is also known as a tax-sheltered annuity. Contributions to 403(b) plans may consist of any combination of salary deferrals, matching contributions, profit sharing contributions, and/or after-tax contributions. 3401(a) Wages A safe harbor definition of compensation based upon Code Section 3401(a) that equals an employee s wages from an employer that are subject to federal income tax withholding.

3 3 404 Grace Period Rule For purposes of the timing of an employer s deduction under Code Section 404, a rule that permits contributions that are made in one tax year to be deducted in the prior tax year. Contributions that are made no later than the due date of the employer s tax return (plus any actual extension of time to file the employer s tax return) may be treated as if they were made as of the last day of the prior year. 410(b) Coverage Test The Code Section 410(b) coverage test; see Coverage Test. 414(s) Compensation Compensation under Code Section 414(s), which is used in various nondiscrimination tests, including the ADP test and the ACP test of a 401(k) plan. It is generally taxable compensation (such as W-2 Wages), although 414(s) compensation may include a participant s pre-tax salary deferrals to a cash or deferral arrangement (such as a 401(k) plan) and salary reductions to a Code Section 125 cafeteria plan. Furthermore, 414(s) compensation may be for the entire year, or may be limited to compensation while participating in the plan. A plan may use any other definition of compensation for purposes of 414(s) compensation, provided the alternative definition is not discriminatory in favor of highly compensated employees (HCEs). If 414(s) Compensation is a non-safe harbor definition of compensation, then the compensation ratio test must be performed to test that definition of compensation. See Compensation Ratio Test. 415 Compensation Compensation under Code Section 415, which is total gross compensation (including pre-tax salary deferrals to a cash or deferral arrangement and salary reductions to a Code Section 125 cafeteria plan) for the entire year. 415 Compensation is used for various purposes including a limited number of nondiscrimination tests (including the gateway allocation) under 401(a)(4), the 415 Limit of Code Section 415, and top-heavy testing of Code Section 416. A plan document may sometimes define compensation for allocation purposes as 415 safe-harbor compensation; although similar, 415 safe-harbor compensation has an entirely different definition than 415 Compensation. 415 Limit The limit on the retirement benefit that can be provided to a participant in a DB plan or the limit on the annual additions of contributions and forfeitures to a participant s account in a DC plan. For 2011, in a DC plan, the maximum annual addition that can be allocated to a participant s account each plan year is limited to the lesser of: $49,000 or 100% of the participant s total compensation. 457 Deferral Limit An overall maximum limit on how much an individual can defer during a calendar year into all Code Section 457 plans. The 457 deferral limit is $16,500 for After 2011, the $16,500 limit may be adjusted for cost-of-living increases. The 457 Deferral Limit is separate from the limit on salary deferrals into all other plans (known as the 402(g) Limit). Therefore, deferrals to a 401(k) or 403(b) plan do not count against an employee s 457 deferral limit. See 402(g) Limit. 457 Plan A plan established by a state, a political subdivision of a state, any agency or instrumentality of a state or political subdivision, or any organization other than governmental unit or church that is tax-exempt. If the requirements of Code Section 457 are met, the participant will not include deferred amounts in gross income until the plan pays the amounts or makes the amounts available to the employee. 5% Owner An employee who owns more than 5% of the outstanding stock or more than 5% of the total combined voting power of all stock in a corporation; or more than 5% of the capital or profits interest of an unincorporated business. A 5% owner is both a key employee for top-heavy purposes and a highly compensated employee (HCE) for nondiscrimination testing purposes. With respect to employees who are more than 5% owners, the Constructive Ownership or Attribution rules apply. For purposes of RMDs, a 5% owner is a person who owns, directly or indirectly, more than 5% of the outstanding stock of the employer or more than 5% of the combined voting power of all stock of the employer at any time during the plan year ending in the calendar year in which the person attains age 70 1/2. If the employer is not a corporation, then a 5% owner is a person who owns, directly or indirectly, more than 5% of the capital or profit interest in the employer at any time during the plan year ending in the calendar year in which the person attains age 70 1/2. The Constructive Ownership or Attribution rules apply. Accrual of Benefits The process of earning benefits. Normally used in conjunction with a DB plan. For 2011, in a DB plan, the maximum annual retirement benefit which the plan can pay to a participant cannot exceed the lesser of: $195,000 or 100% of the average of the highest three consecutive years total compensation.

4 4 Accrual Rate If cross-testing is performed on a DC plan, the percentage that is obtained by dividing the participant s projected benefit (which results from the conversion of the employer contribution allocation) by the participant s 414(s) compensation. Accrue Each year, a participant earns or accrues a portion of the retirement benefit. In a defined contribution plan, the allocations for a year are the accruals. In a defined benefit plan, the accrual is the portion of the retirement benefit that a participant has earned. A participant s retirement benefit in a defined benefit plan is generally not fully earned until retirement. ACP For purposes of the ACP test, the Actual Contribution Percentage (ACP) for a group of employees is equal to the sum of the Actual Contribution Ratios (ACRs) of all employees in the group divided by the total number of employees in the group; this procedure calculates an average for the group of employees. The Actual Contribution Percentage is calculated separately for the highly compensated employee (HCE) group and the non-highly compensated employee (NHCE) group. These percentages are then used in computing the ACP test for the matching contribution and/or after-tax employee contribution components of a plan. ACP Test The Actual Contribution Percentage test (ACP test) ensures that the ACP of the highly compensated employees (HCEs) does not exceed certain limits that are determined by referencing the ACP of the non-highly compensated employees (NHCEs). This test is also referred to as the 401(m) test. Under this test, the ACP of HCEs cannot exceed the greater of: 125% of the ACP of the NHCE group, or the lesser of: o the ACP of the NHCE group plus 2%, or o 200% of the ACP of the NHCE group. ACP Test Safe-Harbor Contribution A matching contribution that is not subject to the ACP test. In order for a matching contribution to comply with the ACP test safe-harbor contribution requirements, the plan must comply with the ADP test safe-harbor contribution requirements (if the plan would otherwise be subject to an ADP test) and the matching contribution must satisfy all of the following requirements: (1) no matching contributions may be made with respect to any salary deferrals that are in excess of 6% of a participant s 414(s) compensation, (2) the rate of matching contributions cannot increase as the rate of a participant s salary deferrals increase, (3) no HCE can receive a higher rate of match than any NHCE, and (4) if the matching contribution is discretionary, then the total amount of discretionary matching contribution that a participant can receive cannot exceed 4% of that participant s 414(s) compensation. See ADP Test Safe-Harbor Contribution. ACR For purposes of the ACP test, the Actual Contribution Ratio (ACR), which is a ratio that is determined by dividing the sum of a participant s total matching contributions, after-tax employee contributions, and/or any forfeitures that are allocated as matching contributions by that participant s 414(s) compensation. See Actual Contribution Ratio (ACR). Active Participant A participant who is actively accruing benefits under the plan. Actual Contribution Percentage (ACP) For purposes of the ACP test, with respect to a group of employees, the sum of the actual contribution ratios (ACRs) of all employees in the group divided by the total number of employees in the group; this formula determines an average for the group of employees. See ACP. Actual Contribution Percentage Test (ACP Test) See ACP Test. Actual Contribution Ratio (ACR) For purposes of the ACP test, a ratio that is determined by dividing the sum of a participant s total matching contributions, after-tax employee contributions, and/ or any forfeitures that are allocated as matching contributions by that participant s 414(s) compensation. Actual Deferral Percentage (ADP) For purposes of the ADP test, with respect to a group of employees, the sum of the actual deferral ratios (ADRs) of all employees in the group divided by the total number of employees in the group; this formula determines an average for the group of employees. See ADP. Actual Deferral Percentage Test (ADP Test) See ADP Test.

5 5 Actual Deferral Ratio (ADR) For purposes of the ADP test, a ratio that is determined by dividing a participant s total salary deferrals by that participant s 414(s) compensation. plan. An adoption agreement is used by master and prototype plan documents in conjunction with a document with fixed language (the basic plan document). See Non-Standardized Adoption Agreement and Standardized Adoption Agreement. Actuarial Assumptions Predictions made by an actuary concerning future events affecting a DB plan, such as mortality, turnover, salary increases, and the rate of return of plan investments. These assumptions are then used to determine benefits or required contributions to the plan. Actuarial Cost Method See Funding Method. Actuarial Equivalent The term used to describe benefits that have the same value even though the timing or forms of the benefit payments differ. For example, if a plan provides for a single life annuity as a form of payment at a participant s normal retirement age, one can use actuarial assumptions to determine the lump-sum value of that payment if it were paid at the normal retirement age (or at any other age). The manner of payments are different, but their values are mathematically equal, using certain assumptions concerning interest and mortality. Actuarial Gain/Loss Gain or loss occurring when actual plan experience is different from the assumptions made by the plan actuary. This is also referred to as an experience gain or loss. Actuary A special mathematician who calculates the annual contribution to a DB plan using actuarial assumptions and a funding method. Administrative Exemption An exemption from the prohibited transaction rules granted on a case-by-case basis by the Department of Labor. Adoption Agreement An adoption agreement is a fill-in-the-blank plan document which contains different plan design provisions and options, such as choices on eligibility, vesting, and forms of distribution. The plan sponsor must select the provisions to be included in the ADP For purposes of the ADP test, the Actual Deferral Percentage (ADP) for a group of employees is equal to the sum of the actual deferral ratios (ADRs) of all employees in the group divided by the total number of employees in the group; this procedure calculates an average for the group of employees. The Actual Deferral Percentage is calculated separately for the highly compensated employee (HCE) group and the non-highly compensated employee (NHCE) group. These percentages are then used in computing the ADP test for the salary deferral component of a 401(k) plan. ADP Test The Actual Deferral Percentage test (ADP test) ensures that the ADP of the highly compensated employees (HCEs) does not exceed certain limits that are determined by referencing the ADP of the non-highly compensated employees (NHCEs). This test is also referred to as the 401(k) test. Under this test, the ADP of HCEs cannot exceed the greater of: a b 125% of the ADP of the NHCE group, or the lesser of: o the ADP of the NHCE group plus 2%, or o 200% of the ADP of the NHCE group. ADP Test Safe-Harbor Contribution One of three contributions that allows an employer to avoid performing the ADP test. This ADP test safe-harbor contribution must be a nonelective contribution equal to at least 3% of 414(s) compensation, a basic matching contribution, or an enhanced matching contribution. ADP test safe-harbor contributions must be 100% vested and are subject to the same distribution restrictions as salary deferrals. However, unlike salary deferrals, ADP test safe-harbor contributions cannot be distributed on account of a participant s hardship. No allocation conditions (such as year of service and/or employment on the last day of the plan year) can be imposed upon participants in order to receive the ADP test safe-harbor contributions. See Basic Match; Enhanced Match. ADR For purposes of the ADP test, the Actual Deferral Ratio (ADR), which is a ratio that is determined by dividing a participant s total salary deferrals by that participant s 414(s) compensation. See Actual Deferral Ratio (ADR).

6 6 After-Tax Employee Contribution A participant s contribution that is made to a plan with money that the employee has already received from the employer. Therefore, these amounts have already been subjected to federal income tax before the participant contributes these amounts to the plan. After-tax Employee Contributions are not the same as Roth Deferrals because they are not deferrals (which are not subject to the same annual dollar limitation that applies to salary deferrals). If after-tax employee contributions are required in order to participate in a plan, then the plan is generally known as a Thrift Plan. If after-tax employee contributions are not required in order to participate in a plan, then the contribution is known as a Voluntary Employee Contribution. After-tax employee contributions create cost basis for the participant. See Roth Deferral. Age-Weighting A formula for allocating an employer s contribution in a DC plan. An age-weighted plan s allocation uses a methodology similar to a defined benefit plan in that allocations are based on a participant s age and compensation. If two participants with the same compensation have different ages, the older participant will receive a larger share of the employer s contribution. Aggregate Funding Method In a DB plan, a funding method in which the normal cost is calculated based on all participants in the aggregate and using projected retirement benefits. A past service liability is not calculated separately from the normal cost, nor are actuarial gains and losses. Allocation The process of dividing contributions, forfeitures, and investment income among participants and crediting these amounts to their individual accounts in DC plans. Allocation Formula The manner in which participants share in the allocation of contributions (and in some cases, forfeitures and investment income) is based on a formula called the allocation formula (or method). For example, a profit sharing plan frequently uses an allocation formula which provides each participant with a share of the employer s contribution based on a ratio of the participant s compensation to the total compensation of all participants eligible to share. Allocation Rate The percentage that is obtained by dividing the participant s employer contribution allocation by the participant s 414(s) compensation. Alternative Limitation Percentage Test One of two alternative tests of the ADP test or the ACP test that limits the actual deferral percentage (ADP) of the group of highly compensated employees (HCEs) in the ADP test (and/or the actual contribution percentage (ACP) of the group HCEs in the ACP test) to the lesser of: (1) the ADP (or ACP) of the group of non-highly compensated employees (NHCEs) plus 2%, or (2) 200% of the ADP (or ACP) of the group of NHCEs. This test is often referred to as the 2%/200% test. Amendment A change in a plan document, adding or deleting plan provisions. Amortization The method of paying an interest-bearing liability (such as a participant loan or past service liability) in a series of installment payments whereby the principle is gradually paid off. Ancillary Benefits Benefits provided by a qualified plan, in addition to retirement benefits. Death and disability benefits are examples of ancillary benefits. Ancillary benefits must be incidental to the primary purpose of a plan, which is to provide retirement benefits. Annual Additions The allocations to a participant s individual account for a limitation year in a DC plan that are taken into account for purposes of applying the 415 Limit. Annual additions include employer contributions, after-tax employee contributions, salary deferrals (Roth or pre-tax), and forfeitures that are allocated to a participant s account. Annual additions do not include trust earnings and Catch-up Contributions. See 415 Limit. Annuity A series of payments made to a participant or beneficiary over a specified period of time, either a fixed period or for life.

7 7 Annuity Purchase Rate (APR) The amount necessary to buy an annuity of $1. An APR is based on several factors, including the normal retirement age, normal form of benefit payments, and mortality and interest assumptions. Anti-Cutback Rule The rule set forth in Code Section 411(d)(6), under which benefits that have already accrued cannot be reduced or eliminated. The Anti-Cutback Rule applies to the timing and forms of distributions that are available to participants; a plan cannot be amended to increase the timing or eliminate any forms of distributions except in limited circumstances. The Anti-Cutback Rule also applies to vesting. Benefits that are protected by the Anti-Cutback Rule are called Protected Benefits. See Protected Benefits. Average Benefit Percentage For purposes of the Average Benefit Percentage Test (which is one of two components of the Average Benefit Test), the Average Benefit Percentage of a group is the average of the benefit percentages of each employee in the group. The benefit percentage for each employee is the employee s benefit or contribution divided by 414(s) Compensation. Average Benefit Percentage Test One of two components of the Average Benefit Test, which is one of three alternative tests that is used to pass the Coverage Test. Under this test, the Average Benefit Percentage received by the nonexcludable non-highly compensated employees (NHCEs) must be at least 70% of the Average Benefit Percentage received by nonexcludable highly compensated employees (HCEs). Applicable Contribution Rate For purposes of restricting targeted QNECs under the 401(k) and 401(m) regulations, a ratio equal to the sum of QNECs that are made for the employee for a plan year divided by the employee s 414(s) compensation. See Representative Contribution Rate. Attribution A rule for determining stock ownership for certain purposes. See Constructive Receipt. Automatic Contribution Arrangement (ACA) The Automatic Contribution Arrangement (ACA) is defined in the Pension Protection Act as a salary deferral arrangement in which an eligible employee has a specified percentage of his or her compensation automatically contributed to the plan, unless he or she elects otherwise. If the sponsor of an ACA provides participants with annual notice of their rights and obligations under the arrangement, it will be afforded ERISA pre-emption of any conflicting state wage withholding laws. See Qualified Default Investment Alternative. Automatic IRA Rollover The default distribution option if a plan provides for involuntary cash-outs of amounts that exceed $1,000 but do not exceed $5,000. If a participant makes no distribution election, then the involuntary distribution must be rolled over to an IRA. The law provides a safe harbor for the investment of amounts that are rolled over into the IRA. If all of the safe harbor rules are not followed, then the plan administrator will remain responsible for the investments in the IRA until the earlier of: (1) one year following the automatic IRA rollover, or (2) the date that the participant rolls the distribution into another IRA. Average Benefit Test One of three alternative tests that is used to pass the Coverage Test. A plan satisfies the Average Benefit Test if the plan satisfies two components: the Nondiscriminatory Classification Test and the Average Benefit Percentage Test. Both of these component tests must be satisfied in order to pass the Average Benefit Test. Balance Forward A method for allocating trust earnings on a Valuation Date. Under the Balance Forward method, the earnings are allocated based upon a participant s account balance at the beginning of a specified period, such as the first day of the plan quarter or plan year. This means that contributions made during the specified period do not receive a share of the earnings for that period. However, some plans make an adjustment to the beginning balance for contributions and distributions made during the period. Ending balances are then rolled forward to the beginning of the next period. Base Benefit Percentage In a DB excess plan that is applying the permitted disparity rules, the benefit that is based upon average compensation at or below the integration level. Base Contribution Percent In a DC plan that is applying the permitted disparity rules, the contribution that is based upon compensation at or below the integration level.

8 8 Basic Match A contribution that satisfies the ADP test safe-harbor contribution requirement. The basic match is equal to 100% of the participant s salary deferrals up to 3% of the participant s 414(s) compensation, plus 50% of the participant s salary deferrals between 3% and 5% of the participant s 414(s) compensation. See Enhanced Match. Basis The basis in stock is the amount paid for the stock. Beneficiary The individual or individuals designated by a participant to receive benefits provided by the plan if the participant dies. Benefit Formula In a DB plan, a participant s retirement benefit is defined by a benefit formula. The benefit formula can be a flat dollar amount ($100 per month), based on compensation (50% of compensation), compensation and service (1% of compensation for each year of service), or integrated with Social Security (i.e., applying the permitted disparity rules). Benefiting A participant is treated as benefiting for coverage and participation testing purposes if the participant accrues a benefit or is allocated a share of the employer contribution or plan forfeitures for the plan year. Benefit Percentage For purposes of the Average Benefit Percentage Test (which is a component of the Average Benefit Test), the employee s benefit or contribution divided by 414(s) compensation. Blackout Notice Notice that must be given to participants prior to an impending Blackout Period. Generally, a Blackout Notice must be given to affected participants at least 30 days but not more than 60 days before the last day that participants can exercise their rights before the Blackout Period begins. The Blackout Notice is required to contain specific information, so that participants can make decisions prior to the Blackout Period. See Blackout Period. Blackout Period A period of more than three consecutive business days during which participants right to direct investments, obtain participant loans, or receive distributions is limited, restricted, or suspended. Borrowing A mechanism to pass ADP or ACP testing. If a plan significantly passes the ADP test but fails the ACP test, then the plan administrator can move some salary deferrals out of the ADP test and into the ACP test. Borrowing of salary deferrals is permissible so long as the plan satisfies the ADP test both before and after moving the salary deferrals. The moved salary deferrals then are counted in the ACP test and may help the plan pass the ACP test without the necessity of any correction. Similarly, if a plan significantly passes an ACP test of QMACs but fails the ADP test, then the plan administrator can move some QMACs out of the ACP test and into the ADP test, with similar restrictions. Bottom-up QMAC or QNEC A QMAC or QNEC that is allocated only to specific NHCEs in order to make the employer contribution needed to pass a failed ADP or ACP test as low as possible. Typically, a Bottom-up QMAC or QNEC is first allocated to the NHCE with the lowest amount of 414(s) compensation, in an amount equal to the lesser of: (a) whatever amount is necessary to pass either the ADP test or the ACP test, or (b) the maximum amount that can be taken into account under the targeted QNEC or QMAC rules (prior to 2006, the only limit was the NHCE s 415 limit). If the limit for the NHCE with the lowest amount of 414(s) compensation has been reached and the ADP test or the ACP test is still failing, then a Bottom-up QMAC or QNEC is allocated to the NHCE with the second lowest amount of 414(s) compensation in the same fashion (this process continues for all NHCEs until the tests pass). See Representative Matching Rate. Break in Service Under the 1000 Hour Method, a computation period of twelve consecutive months during which an employee has not completed more than 500 hours of service. Under the Elapsed Time Method, a break in service is a Period of Severance by the employee of at least 12 consecutive months. A break in service is also called a oneyear break in service. See Period of Severance. Broadly Available One of two alternative pre-conditions for being able to cross-test a plan. Ageweighted plans generally pass the broadly available pre-condition. See Gateway Allocation.

9 9 Buy-Back A plan provision that entitles a rehired participant to repay the amount that was previously distributed and then to have the previously forfeited benefits restored. The Buy-Back provision is only available to rehired participants who have not incurred five consecutive one-year breaks in service. In a DC plan, if the cashout is repaid within 5 years of the participant s date of reemployment, then the participant s forfeited benefit must be restored. In a DB plan, repayment of the distribution must include interest. Calendar Year Election In the case of a non-calendar plan year, an election by an employer to use as the calendar year time frame for determining which employees had compensation in excess of the HCE dollar limit. If this election is mate, then the employer uses the calendar year beginning within the 12-month period prior to the beginning of the plan year. This election must be part of the plan document; it is not simply administrative discretion. Career Average Compensation Compensation averaged over a participant s entire service with the employer. It is used in conjunction with the benefit formula in a DB plan. Carry-forward If contributions in excess of deduction limit of Code Section 404 are contributed to a plan in one year, then the employer is able to deduct the previous nondeductible contributions in the next year, subject to next year s deduction limit. Cash Balance Plan A type of Defined Benefit Plan that provides a benefit expressed as the value of a Hypothetical Account. The Hypothetical Account is typically determined by crediting the participant s account with a percentage of each year s compensation plus a stated rate of interest. See Hypothetical Account. Cash-out A distribution of a participant s vested benefit upon Severance of Employment, in the form of a lump-sum distribution. Cash Value The value of an insurance policy if the policy is canceled and the net worth of the policy is taken in cash. Catch-up Contributions Additional elective deferrals to a traditional 401(k) plan, 403(b) plan, SARSEP, SIMPLE IRA, SIMPLE 401(k) plan or 457 plan, if the plan permits, that may be made by a Catch-up Eligible Participant. Catch-up Contributions were added to the Code by EGTRRA and are not subject to the nondiscrimination or top-heavy rules. There is also a special Catch-up Contribution available for employees who are within 3 years of normal retirement age in either a 403(b) or a 457 plan. Catch-up Eligible Participant A participant who has attained age 50 (or who is expected to attain age 50 by year end). Catch-up Limit The maximum amount of Catch-up Contributions that a Catch-up Eligible Participant may make during a year. For a traditional 401(k), 403(b), SARSEP, or 457 plan, the Catch-up Limit on Catch-up Contributions is $5500 for For a SIMPLE IRA or SIMPLE 401(k) plan, the Catch-up Limit on Catch-up Contributions is $2500 for These amounts will be adjusted for cost-of-living increases after Cliff Vesting Schedule A participant is not vested until a certain number of years of service, at which point the participant is 100% vested. For example, if a participant is 0% vested for the first two years of service, but becomes 100% vested after completing the participant s third year of service, then the plan has a 3-year cliff vesting schedule. CODA A cash or deferred arrangement plan. See Cash or Deferred Arrangement (CODA) Plan. Cash or Deferred Arrangement (CODA) Plan Generally, a 401(k) plan. However, a CODA plan historically referred to a specific type of 401(k) plan in which participants were given the option of taking all or a portion of an employer contribution in cash or deferring all or a portion of the employer contribution into the plan. Code See Internal Revenue Code.

10 10 Code Section 402(g) The limit the Code imposes on deferrals under a 401(k) or 403(b) plan. For 2011, the deferral limit is $16,500. Code Section 409A Code Section 409A made significant changes to the taxation rules applicable to nonqualified deferred compensation. The new law restricts when participants may elect to defer compensation, requires payments to be scheduled when deferred, generally prohibits the acceleration of benefit payments, and restricts a participant s ability to defer a scheduled payment. Failure to comply with the requirements will subject the participant to immediate taxation, interest charges and a penalty tax. Code Section 411(a) The section of the Code governing vesting under a qualified plan. Code Section 415 The section of the Code that imposes an annual limit on contributions (employee and employer) to a plan. See 415 Limit. Collectibles Permitted investments of a qualified trust, provided the investments are generally not made at a participant s direction. Collectibles include such items as diamonds and art. However, since the plan must be for the exclusive benefit of participants, any collectibles held by the trust must be securely stored for safekeeping, not showcased in the employer s office. Collective Bargaining The good faith negotiation between an employer(s) and one or more unions representing employees concerning issues such as compensation, working conditions, and employee retirement benefits. Compensation The plan s definition of wages, salary, or income that an employee receives for services performed for the employer, which is used for calculating benefits or contributions. The plan document may define compensation in any manner (e.g., as only base compensation) provide the definition is not discriminatory. If a safe harbor definition of compensation (i.e., a nondiscriminatory definition) is used, then a discrimination test on the definition of compensation need not be performed. However, if a non-safe harbor definition of compensation is used in the plan document (such as compensation excluding bonuses, commissions, and overtime), then the Compensation Ratio Test must be performed annually. Regardless of how Compensation is defined, Code Section 401(a)(17) limits the amount of annual Compensation that a plan can recognize. See Compensation Limit; Compensation Ratio Test. Compensation Limit Compensation used to calculate benefits and contributions is limited by Code Section 401 (a)(17). The limit is $200,000, as adjusted for cost of living. For 2011, the Compensation Limit is $245,000. Compensation Ratio Test The nondiscrimination test on a plan s definition of compensation when a plan does not use a safe harbor definition of compensation. This test is done by comparing the averages of the percentages of compensation taken into account by the plan to safe harbor compensation, for the HCE group and for the NHCE group. The average of the HCEs cannot exceed the average of the NHCEs by more than a de minimis percentage, which the IRS has unofficially declared is 2%. Comp-To-Comp See Pro Rata Allocation, Contributions. Computation Period A space of time that is used to apply various provisions of a plan or the law relating to the determination of an employee s service with the employer. A computation period is usually a 12-month period that (1) begins as of an employee s date of hire (and anniversaries of date of hire) or (2) is the same as the plan year. Constructive Ownership or Attribution A rule for determining stock ownership for certain purposes, in which stock owned by one individual or entity is deemed to be owned by other individuals or entities. For the definitions of Highly Compensated Employee and Key Employee, Code Section 318 applies, and an individual is generally considered to own the stock owned by the individual s spouse, children, grandchildren, or parents. However, the attribution rules prohibit double attribution. See Double Attribution. For control group purposes, Code Section 1563 has complex rules on how to attribute stock ownership.

11 11 Constructive Receipt If an individual has the right to take compensation currently or defer it until some later point in time, then the individual is considered to have constructive receipt of the compensation and the compensation is generally currently taxable. A 401(k) plan or a 403(b) plan is an exception to this rule. Corporation A business entity which is a separate legal entity that is owned by shareholders. Income earned by the business is taxable to the corporation. If this income is passed on to shareholders in the form of dividends, shareholders are also taxed on this income. Contingent Benefit Rule All benefits and allocations (except for matching contributions) cannot be conditioned on whether a participant elects to have salary deferrals made to a 401(k) plan. Contingent Notice or Maybe Notice See Maybe Notice. Contribution The amount which is deposited into a plan in order to fund for retirement benefits. Contributions may be made by employers, employees or both. Corrective Distribution A distribution of an excess contribution, an excess deferral, or the vested portion of an excess aggregate contribution. A corrective distribution may be used when a 401(k) plan does not satisfy one of the various tests or limits: the ADP test under Code Section 401(k), the ACP test under Code Section 401(m), or the maximum deferral limit under Code Section 402(g), which is known as the 402(g) Limit. Cost Basis The portion of the participant s benefit that has already been taxed. This portion is not taxable again upon distribution from the plan. After-tax assets create cost basis in the plan, such as PS-58 costs, repayment of a deemed distribution of a loan, or after-tax employee contributions, or Roth deferrals. Contribution Formula In a money purchase plan, the amount which the employer must contribute is defined by a contribution formula, such as 10% of the sum of all eligible participants compensation. Contributory Plan A retirement plan in which participants make contributions (other than salary deferrals). Employee contributions may be required or voluntary. Also known as a thrift plan. Controlled Groups A group of businesses which are either part of a parent-subsidiary or a brothersister group. The determination of whether a group of businesses is a controlled group is made by applying the rules found in Code Section For qualified plan purposes, members of a controlled group are treated as a single employer. Corporate Trustee An entity, such as a bank or trust company, that contracts with a plan to hold the plan s assets. Cost Basis Recovery When a participant has cost basis in a plan, the portion of the cost basis that the participant receives in each distribution. To determine the amount of the cost basis recovery in a distribution, the amount of the distribution is multiplied by the Exclusion Ratio. The process of cost basis recovery is to prevent the participant from receiving a distribution of all of the after-tax assets without taking a proportionate amount of pre-tax earnings. See Exclusion Ratio. Coverage Test A test that must be passed by qualified plans (and some non-qualified plans) usually on an annual basis. The coverage test is also known as the 410(b) Coverage Test, because it is found in Code Section 410(b). The coverage test consists of three alternative tests, any of which can be used: the Percentage Test, the Ratio Percentage Test, or the Average Benefit Test. See Average Benefit Test. Covered Compensation The average of the Taxable Wage Bases for the 35 calendar years ending with the year that a participant attains Social Security retirement age. Covered Compensation is normally used in a DB plan that is applying the permitted disparity rules (i.e., an integrated plan).

12 12 Credited Service Period of employment or plan participation which is defined under the plan document and recognized for various plan purposes, including determining the amount of plan benefits, eligibility, and vesting. Cross-Testing This method converts a plan of one variety into a plan of another variety for nondiscrimination testing. When cross-testing a DC plan, the allocations (including any gateway allocations) are converted into projected benefits at retirement and those projected benefits are tested using the General Nondiscrimination Test to demonstrate that they are nondiscriminatory. As a pre-condition for cross-testing, a plan is required either to provide a Gateway Allocation or to demonstrate that the benefits are Broadly Available. When cross-testing a DB plan, the accruals are converted into allocations and are tested using the General Nondiscrimination Test. See General Nondiscrimination Test. Current Liability In a DB plan, this is the value of plan liabilities to all participants as if the plan was currently terminating. Current Year Testing A procedure that is elected by the plan sponsor in which the ADP or ACP tests use the NHCEs ADP or ACP of the current plan year. The plan document must specify whether current year testing will be used. Daily Valuation A method for allocating trust earnings in which a participant s account is valued each business day (the Valuation Date). These plans generally use a share accounting or unit accounting method of allocating earnings. DB Plan A defined benefit plan. See Defined Benefit Plan DC Plan A defined contribution plan. See Defined Contribution Plan. Death Benefit An ancillary benefit provided to a participant s beneficiary upon the participant s death. Deductible Contribution The amount which an employer can contribute and use as a tax deduction. Deductible contributions are limited by Code Section 404. See Deduction Limit. Deduction Limit The maximum contribution that an employer can contribute to a plan and receive a tax deduction, based upon Code Section 404. Deemed Distribution For federal income tax purposes, an imaginary distribution of a defaulted loan (or a loan that does not otherwise comply with Code Section 72(p)), when a participant has not yet reached a distributable event. The participant pays federal income tax on a deemed distribution of a loan. However, the defaulted or noncompliant loan remains in the participant s account and on the plan s balance sheet until the participant reaches a distributable event. Deferral The compensation that a participant elects to defer into a 401(k) plan or a 403(b) plan. These deferrals may either be pre-tax elective or salary deferrals or after-tax Roth deferrals. Deferral Limit The general amount of salary which a participant can defer into a 401(k) plan. The limit is $16,500 for After 2011, the $16,500 limit may be adjusted for costof-living increases. This limit is also referred to as the 402(g) limit. Defined Benefit 415 Limit This is a limit on the annual benefit that may be provided by a defined benefit plan. It is generally equal to the lesser of (1) 100% of a participant s highest three year average compensation, or (2) a cost-of-living adjusted dollar amount. For 2011, this dollar amount is $195,000.

13 13 Defined Benefit Plan A plan that promises to pay a stated retirement benefit to participants at some future distributable event. Retirement benefits are based upon a benefit formula that is stated in the plan document. A Defined Benefit Plan is also known as a DB plan. Defined Contribution 415 Limit This is a limit on the annual additions that may be credited to a participant s accounts in a plan. The limit is the lesser of (1) 100% of the participant s compensation, or (2) a cost-of-living adjusted dollar amount. This dollar amount is $49,000 for See Annual Additions. Defined Contribution Plan A plan which is an individual account plan and which either defines the amount the employer must contribute on behalf of participants or defines how a contribution is to be allocated among participants. A Defined Contribution Plan is also known as a DC plan. Determination Letter A written opinion of the IRS as to the tax qualified status of a retirement plan document. See Rulings Program. Determination Year For top-heavy purposes, the one (1) year look-back period that ends on the determination date. For a plan that has been maintained for more than one plan year (an existing plan), the determination year is generally the preceding plan year. For a newly established plan that has its first plan year as a full 12 months, the determination year is the first plan year. In the case where the plan has a short plan year, the determination year is the one (1) year look-back period that ends on the determination date. Directed Trustee A directed trustee is typically a financial institution that serves as a trustee but has no discretionary authority regarding the investment of plan assets. Rather, investment directions are provided by the employer and/or plan participants. Definitely Determinable This is a formula written into a plan that specifically states how the contribution is to be calculated or allocated. Department of Labor (DOL) The U.S. governmental department that enforces Title I of ERISA and has jurisdiction to enforce employee rights against plan sponsors, plan administrators, and other fiduciaries. Department of Treasury The U.S. governmental department that is responsible for the economic and financial security of the United States. The department manages many aspects of Federal finances, including collection of taxes and enforcement of tax law. Determination Date The date on which the top-heavy status of a plan is determined. The determination date of a plan that has been maintained for more than one plan year (an existing plan) is the last day of the preceding plan year. For a newly established plan, the determination date is the last day of the first plan year. Direct Rollover An Eligible Rollover Distribution that is rolled-over by a plan s trustee to another plan or IRA. If a direct rollover is entirely an eligible rollover distribution, then the direct rollover is not included in income for federal income tax purposes and is not subject to federal income tax withholding. See Eligible Rollover Distribution Disability Benefit Any benefit which is provided to a participant in the event of Total and Permanent Disability prior to retirement. Disability, Total and Permanent A physical or mental condition of a participant that constitutes disability for purposes of a plan. Total and Permanent Disability can be defined in the plan document as a condition that is determined by a licensed physician or as the Social Security definition of disability. Discretionary Contribution A contribution which is made at the discretion of the employer. The employer decides how much, if anything, to contribute. Contributions to profit sharing plans are usually discretionary.

14 14 Discretionary Trustee A discretionary trustee is a plan trustee that has the authority to make investment decisions regarding the plan s assets. Discrimination Providing more favorable benefits to certain employee groups. A qualified plan must generally benefit all employees on a reasonably equivalent basis. Discrimination in favor of highly compensated employees will disqualify a retirement plan. Disposition Generally, an employee disposes of stock when he/she sells the stock. Specifically, a disposition of stock acquired through exercise of a stock option includes a sale, gift or a transfer of legal title but does not include a pledge of the stock, a transfer at death or certain tax-free exchanges. Disqualified Plan A plan subject to Disqualification. See Disqualification. Distributable Event A triggering event that would permit a distribution to be made to a participant from a plan. Distributable Events include retirement, and in some plans, death, disability, or other termination of employment. Distribution The payment of a participant s vested benefit from a retirement plan to the participant or the participant s beneficiary. Distribution Calendar Year A calendar year for which a Required Minimum Distribution (RMD) must be made. Disqualification The loss of tax-favored status of a plan back to the point in time when a disqualifying provision was included in the plan or the point in time when a disqualifying event occurred. Disqualified Person For purposes of a prohibited transaction under Code Section 4975, an individual or entity, including: (a) A fiduciary of the plan; (b) An individual providing services to the plan; (c) An employer whose employees are covered by the plan; (d) An employee organization whose members are covered by the plan; (e) An owner of at least 50% of a business whose employees or members are covered by the plan; (f) An entity that at least 50% is controlled by a Disqualified Person; (g) An officer, director, 10% owner of a Disqualified Person, or a Highly Compensated Employee who earns 10% or more of the yearly wages of a Disqualified Person; or (h) A relative of category (a), (b), (c), or (e). For purposes of this category (h), a relative is a spouse, ancestor, lineal descendant, or spouse of lineal descendant. Diversification The principle which requires that plan fiduciaries diversify trust investments in order to minimize the risk of large losses. Diversification is not simply investing in a wide variety of investment vehicles. Fiduciaries must also take into account various factors, including the amount invested in each type of asset, the size of the trust, the plan s liquidity needs, current and projected rates of return on plan investments, and the distribution of assets in relation to geographical location, industries, and maturities. DOL The Department of Labor. See Department of Labor (DOL). Double Attribution An impermissible attribution of ownership interest, where ownership interest is first attributed to a family member, but is not be attributed to another family member of that family member. For example, a participant owns 10% of a corporation, where the participant s spouse, and the participant s spouse s father are also employees. The participant s spouse is attributed the participant s stock; however, the participant s spouse s father is not attributed the participant s stock, because of the rule against Double Attribution. See Constructive Ownership. If a Disqualified Person engages in a transaction with the plan, then the transaction may be a Prohibited Transaction. See Prohibited Transaction.