Glossary
72(t) Early Retirement Distribution
Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancy) of the employee and beneficiary, the tax described in section 72(t)(1) will not be applicable. Pursuant to section 72(t)(5), in the case of distributions from an IRA, the IRA owner is substituted for the employee for purposes of applying this exception. Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 59½, the exception to the 10-percent tax does not apply, and the taxpayer's tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest fo
ACATS
Automated Customer Account Transfer Service: A system that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank. Stocks, bonds, cash, unit trusts, mutual funds, options and other investment products can be transferred via the ACATS system.
Accrued Benefit
The amount of benefit that will be provided to a participant in a defined benefit plan when that participant reaches normal retirement age.
Accumulation Phase
The period during which an individual adds to his/her nest egg.
ACP Test
Actual Contribution Percentage Test
Actuary
A business professional who uses mathematical formulas, statistics and risk analysis to calculate the employer's annual contributions to a defined benefit plan.
ADP
Actual Deferral Percentage is an annual test in a 401(k) plan that compares the average salary deferrals of highly compensated employees (HCEs) to that of nonhighly compensated employees (NHCEs). Each employee’s deferral percentage is the percentage of compensation that has been deferred to the 401(k) plan. The deferral percentages of the HCEs and NHCEs are then averaged to determine the ADP of each group. To pass the test, the ADP of the HCE group may not exceed the ADP for the NHCE group by 1.25 percent or the lesser of 2 percentage points and two times the NHCE ADP.
ADP or Actual Deferral Percentage
is an annual test in a 401(k) plan that compares the average salary deferrals of highly compensated employees (HCEs) to that of nonhighly compensated employees (NHCEs). Each employee’s deferral percentage is the percentage of compensation that has been deferred to the 401(k) plan. The deferral percentages of the HCEs and NHCEs are then averaged to determine the ADP of each group. To pass the test, the ADP of the HCE group may not exceed the ADP for the NHCE group by 1.25 percent or the lesser of 2 percentage points and two times the NHCE ADP.
Age 59 1/2 Rule
Generally, if you are under age 59 1/2, you must pay a 10% additional tax on the distribution of any assets (money or other property)from your traditional IRA. Distributions before you are age 59 1/2 are called early distributions. The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount. a number of exceptions to this rule are listed under exceptions of publication 590.
Alternate Payee
An alternate payee may be the participant’s spouse, former spouse, child or other dependent.
Annual Addition
Annual additions are the total of all employer contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account.
Annual Minimum Contributions
The amount an employer must contribute to the retirement plan on behalf of an employee, which amount varies depending on the type of the plan.
Annual Nondiscrimination Testing
Yearly tests to determine if benefits for highly compensated employees exceed established limits as compared to the benefits for nonhighly compensated employees.
Annual Return
Although retirement plans are generally not required to pay taxes, some plans must annually file Form 5500 and related Schedules to report financial and operational information.
Annuitant
The annuitant is the person who establishes the annuity contract. The insurance company may use other terms besides “annuitant” to refer to the person who establishes the annuity contract, such as, “owner,” “applicant,” “insured,” or “you.” *IRS.gov
Annuity
A series of payments under a contract that are made at regular intervals and over a period of more than one year.
Benefit
The amount and method of payment a plan will pay to an employee or his or her beneficiary upon the occurrence of some event described in the plan, like retirement, disability or death.
Benefit Formula
The method (usually a mathematical equation) a plan uses to calculate the amount of benefits earned by employees.
Cash Balance Plan
A type of defined benefit plan that includes some elements that are similar to a defined contribution plan because the benefit amount is computed based on a formula using contribution and earning credits, and each participant has a hypothetical account. Cash balance plans are more likely than traditional defined benefit plans to make lump sum distributions.
Catch-Up Contributions
Plans that allow employees to contribute to their own retirement may permit employees age 50 or older at the end of the calendar year to make additional (catch-up) contributions to plans. Amount of the catch-up contributions depend on the type of plan.
Code
Internal Revenue Code
COLA
Cost of Living Adjustment
Collectibles
Collectibles include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins*, Alcoholic beverages, and Certain other tangible Personal Property. If your IRA invests in collectibles, the amount invested is considered distributed to your in the year invested. You may have to pay the 10% additional tax on early distributions. *Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins in certain gold, silver, palladium, and platinum bullion.
Contribution Limits
The law limits the amounts that can be contributed annually to a plan for an employee. The limits differ depending upon the type of plan and upon whether it is the employer or the employee who is contributing.
Cover
The law requires an employer who has a retirement plan to enroll employees who meet certain requirements. The eligibility requirements vary by type of plan. An employer may use less restrictive eligibility requirements than those legally required.
Coverage Tests
The law requires certain plans to meet annual tests to ensure that plans do not disproportionately benefit the business' owners and highly compensated employees.
Defined Benefit Plan
A defined benefit plan is any plan that is not a defined contribution plan. Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. Generally, you will need continuing professional help to have a defined benefit plan.
Defined Benefit Plan
This type of plan, also known as a traditional pension plan, promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as the participant’s salary, age and the number of years he or she worked for the employer. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service.
Defined Contribution Plan
A defined contribution plan provides an individual account for each participant in the plan. It provides benefits to a participant largely based on the amount contributed to that participant's account. Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan.
Design Flexibility
Although certain terms for retirement plans are legally required, an employer can have other optional terms and provisions permitted for that type of plan.
Designated Roth account
A separate account under a 401(k) or 403(b) plan to which designated Roth contributions are made, and for which separate accounting of contributions, gains, and losses is maintained. *IRS.gov
Disqualified Person
Disqualified Persons include your fiduciary and members of your family (Spouse, Ancestor, Lineal Descendant, and Any Spouse of a Lineal Descendant)
Early Distribution
Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions. Early distributions are usually subject to an additional 10 percent tax. Early distributions must also be reported to the IRS. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). * IRS.gov
Earned Income
Earned income includes all the taxable income and wages you get from working. There are two ways to get earned income: You work for someone who pays you, or you work in a business you own.
Elective Deferral
Amounts contributed to a plan by the employer at the employee's election and which, except to the extent they are designated Roth contributions, are excludable from the employee's gross income. Elective deferrals include deferrals under a 401(k), 403(b), SARSEP and SIMPLE IRA plan.
Employee Retirement Income Security Act of 1974 (ERISA)
A federal law that sets standards of protection for individuals in most voluntarily established, private-sector retirement plans. ERISA requires plans to provide participants with plan information, including important facts about plan features and funding; sets minimum standards for participation, vesting, benefit accrual, and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a claims and appeals process for participants to get benefits from their plans; gives participants the right to sue for benefits and breaches of fiduciary duty; and, if a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC).
Employee Stock Ownership Plan (ESOP)
A type of defined contribution plan that is invested primarily in employer stock.
Employer
An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. A sole proprietor is treated as his or her own employer for retirement plan purposes. However, a partner is not an employer for retirement plan purposes. Instead, the partnership is treated as the employer of each partner.
Employer Contributions
Money deposited by an employer into the plan for the benefit of plan participants.
ERISA
Employee Retirement Income Security Act of 1974
Excess Contribution
The amount contributed to your plan for the year that is more than your taxable compensation for the year, or higher than the defined contribution limit for the year. See Tax on Excess Contributions
Fiduciary
Anyone who: Exercises any discretionary authority or discretionary control in managing your IRA or exercises any authority or control in managing or disposing of its assets. Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so. Has any discretionary authority or discretionary responsibility in administering your IRA.
Final Average Pay
A number of months or years, as specified in a defined benefit plan, used to determine an employee's average salary, which in turn determines the amount of benefits the participant will receive.
Forfeiture
The part of an employee’s account balance (employer contributions) that is lost when the employee terminates employment. It is the part that was not vested.
Form 1099-R
Distributions from pensions, annuities, profit-sharing and retirement plans (including section 457 state and local government plans), IRAs, insurance contracts, etc., are reported to recipients on IRS Form 1099-R.
Form 5498
The information on Form 5498 is submitted to the Internal Revenue Service by the trustee or issuer of your individual retirement arrangement (IRA) to report contributions, including any catch-up contributions, required minimum distributions (RMDs), and the fair market value (FMV) of the account.
Form 5498-ESA
Form 5498-ESA is furnished to the Coverdell education savings account (ESA) beneficiary by the trustee or issuer of your Coverdell ESA. Form 5498-ESA reports contributions and rollover contributions made for you(Coverdell Beneficiary).
Genuine Self-Direction™
The freedom to investment in ANYTHING allowed by law, facilitating total diversification via self-directed retirement programs. The IRS allows a wide range of traditional and non-traditional investments in retirement plans.
Hardship Withdrawals
Certain plans may allow employees to withdraw money from the plan while still employed to relieve an immediate and heavy financial need of the employee, dependent or beneficiary. Amount withdrawn can't be more than necessary to satisfy the financial need.
Health Savings Account (HSA)
A tax-exempt account that you set up to pay or reimburse medical expenses you incur. You must be an eligible individual to qualify for an HSA. * You must be covered under a high deductible health plan (HDHP) on the first day of the month * You have no other health coverage except accidental, disability, dental care, vision care, or long-term care * You cannot be claimed as a dependent on someone else’s tax return.
Highly Compensated Employee
An individual who: * Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or * For the preceding year, received compensation from the business of more than $105,000 (if the preceding year is 2008, and $110,000 if the preceding year is 2009), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
Highly Compensated Employees
An individual who owned more than 5% of the employer business at any time during the year or the preceding year or received compensation for the preceding year of more than an annually adjusted amount.
Includible Compensation
Generally, for 403(b) and 457(b) plans, this is the amount of includible income and benefits that a participant receives from the employer who maintains the retirement plan and that must be included in the participant's income.
Individual Retirement Account (IRA)
An individual account or annuity set up with a financial institution, such as a bank or a mutual fund company. Under federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax deferred. In addition, participants can transfer money from an employer retirement plan to an IRA when leaving an employer. IRAs also can be part of an employer plan.
IRA
An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. You may also be eligible for a tax credit equal to a percentage of your contribution. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.
IRC 401(k)
IRC 401(k) plans are the most popular type of retirement plan used today. They can be a powerful tool in promoting financial security in retirement and are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.
IRC 403(b) (TSA)
A 403(b) tax-sheltered annuity (TSA) plan is a retirement plan, similar to a 401(k) plan, offered by public schools and certain 501(c)(3) tax-exempt organizations. An individual may only obtain a 403(b) annuity under an employer’s TSA plan.
IRC 457(b) Deferred Compensation Plans
Plans of deferred compensation described in IRC section 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).
Loans
If permitted by the plan, amount that an employee may borrow from the plan but must repay along with stated interest.
Matching Contribution
The amount an employer deposits to the plan for a plan participant that equals some portion (usually percentage) of an employee's contributions.
Money Purchase Plan
Contributions to a money purchase pension plan are fixed and are not based on your business profits. For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits.
Operate
Generally means running the plan in accordance with its written terms, filing any required returns, performing required tests and updating the plan so that it conforms to any changes in the law.
Participant
An eligible employee who is covered by a retirement plan. See the discussions of the different types of plans for the definition of an employee eligible to participate in each type of plan.
Payroll Deductible IRA
As an employer, you may want to consider offering your employees a Payroll Deduction IRA. Under a Payroll Deduction IRA, your employee establishes an IRA (either a Traditional IRA or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction amount for the IRA. This is probably the simplest retirement arrangement that a business can have. It is so easy that, in fact, no plan document is needed under this arrangement.
Payroll Deduction
The amount an employee chooses to have the employer deduct from his or her wages to deposit to a retirement plan.
Payroll Deduction IRA
As an employer, you may want to consider offering your employees a Payroll Deduction IRA. Under a Payroll Deduction IRA, your employee establishes an IRA (either a Traditional IRA or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction amount for the IRA. This is probably the simplest retirement arrangement that a business can have. It is so easy that, in fact, no plan document is needed under this arrangement.
Per Stirpes
A stipulation that, should a beneficiary predecease the grantor (account owner), that beneficiary's share of the account be divided equally among those of his or her lineal descendants at the first generation of living descendants. The Per Stirpes provision includes children unborn at the time of designation.
Plan Administrator
The person who is identified in the plan document as having responsibility for running the plan. It could be the employer, a committee of employees, a company executive, or someone hired for that purpose.
Plan Document
A written instrument under which the plan is established and operated.
Plan Fiduciary
Anyone who exercises discretionary authority or discretionary control over management or administration of the plan, exercises any authority or control over management or disposition of plan assets, or gives investment advice for a fee or other compensation with respect to assets of the plan.
Plan Trustee
Someone who has the exclusive authority and discretion to manage and control the assets of the plan. The trustee can be subject to the direction of a named fiduciary and the named fiduciary can appoint one or more investment managers for the plan’s assets.
Plan Year
A 12-month period designated by a retirement plan for calculating vesting and eligibility, among other things. The plan year can be the calendar year or an alternative period, for example, July 1 to June 30.
Pre-Approved Plan
The plan document, for some types of plans, sold by institutions or practitioners that has been approved in form by the IRS as meeting that plan type's basic legal requirements.
Premature Distributions
Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions. Early distributions are usually subject to an additional 10 percent tax. Early distributions must also be reported to the IRS. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). * IRS.gov
Profit Sharing Plan
Is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) plan.
Prohibited Transaction
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.
Qualified Distribution - Designated Roth
A qualified distribution of designated Roth contributions is excludable from gross income. A qualified distribution is one that occurs at least 5 years after the year of the participant’s first designated Roth contribution (counting such first year as part of the 5) and is made: *On or after attainment of age 59½, *On account of the participant’s disability, or *On or after the participant’s death. *IRS.gov
Rollover
Generally a tax-free distribution of cash or other assets from one retirement plan to another retirement plan. The contribution to the second retirement plan is called a “rollover contribution.”
Roth IRA
An account or annuity set up in the United States solely for the benefit of you or your beneficiaries. It is an individual retirement arrangement. However, it differs from traditional IRAs in that contributions are not deductible. For information on contributions and the limitations please refer to Chapter 2 of the Publication 590, Individual Retirement Arrangements.
Safe Harbor 401(k) plan
A safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make contributions for each employee. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the complex tax rules ordinarily applied to traditional 401(k) plans.
Salary Deferrals
The amount an employee can choose to have the employer deduct from his or her pay for contribution into a retirement plan that permits employee contributions. The amount an employee can defer varies by type of plan and is subject to annual limits.
SARSEP
Salary Reduction Simplified Employee Pension plan is a SEP plan set up before 1997 that permits contributions to be made through employee salary reductions. Under a SARSEP, employees and employers make contributions to traditional IRAs set up for the employees, subject to certain percentage-of-pay and dollar limits. No new SARSEPs can be established after December 31, 1996. However, employers who established SARSEPs prior to January 1, 1997, can continue to maintain them and new employees of the employers hired after December 31, 1996, can participate in the existing SARSEP.
SEP IRA
A SEP is a Simplified Employee Pension plan. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SEP, employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self –employed individuals), subject to certain limits.
Set Up
The process to establish a plan. Generally adopting a plan document (model form, pre-approved or individually drafted) and setting up an account(s) or trust to receive deposited money. 403(b) plans require written program but not a single plan document.
SIMPLE | Savings Incentive Match Plan for Employees of Small Employers
A plan in which a small business with 100 or fewer employees can offer retirement benefits through employee salary reductions and employer non-elective or matching contributions (similar to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE IRA plans impose few administrative burdens on employers because IRAs are owned by the employees, and the bank or financial institution receiving the funds does most of the paperwork. While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately 100 percent vested in both.
Summary Plan Description
A document provided by the plan administrator that includes a plain language description of important features of the plan, for example, when employees begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when payment is received and in what form, and how to file a claim for benefits. Participants must be informed of material changes either through a revised Summary Plan Description or in a separate document called a Summary of Material Modifications.
Total(K)®
The self-directed 401(k) exclusively offered by American Pension Services, Inc.™ This plan provides the maximum investment flexibility allowed by law, combining full diversification with all the benefits of a traditional/Roth 401(k).
Traditional IRA
A traditional IRA is a way to save for retirement that gives you tax advantages. * Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and * Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed. IRA Resources: Publication 590 explains the details of IRAs including: * Setting up an IRA * Contributing to an IRA * Transferring money or property to and from an IRA * Handling an inherited IRA * Receiving distributions (making withdrawals) from an IRA * Taking a credit for contributions to an IRA * A comparison of traditional and Roth IRAs http://www.irs.gov/retirement/article/0,,id=137283,00.html
Vesting
The portion of retirement benefits owned by the employee and no longer at risk of being forfeited. Plan must state the yearly percetnage the employee is vested in his or her retirement benefits. Employee contributions must be immediately vested.
Years of Service
The time an individual has worked in a job covered by the plan. It is used to determine when an individual can participate and vest and how they can accrue benefits in the plan. Generally, a Year of Service requires that an employee accrues at least 1,000 hours of service over a 12-consecutive-month period.