RetirementServicesnet: Glossary

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Glossary

Summary: This glossary of definitions is to be used as a general guide; it is not all inclusive. Please consult your financial/tax advisor for specific compliance information and assistance.

Terms and Definitions
401(k) Plan	Variation of Profit Sharing Plan or Thrift Plan which allows employee participants to defer a portion of their compensation into the retirement plan. Employers can match a portion or all of the employee's contribution.
403(b) Plan	Variation of Profit Sharing or Thrift Plan available to non-profit organizations (hospitals, churches and schools) which allows employee participants to defer a portion of compensation into the retirement plan. Employers can match or make discretionary contributions.
457 Plan	Type of Non-Qualifed Plan used by government institutions (cities, states and municipalities) which allows employees to defer a portion of compensation.
Cash Balance Plan	Type of Defined Contribition Plan in which employers make annual contributions for each employee; the contributions earn interest at rates similar to Treasury bonds.
Combination Plan	Combination of Profit Sharing and Money Purchase Plans through which the employer can make the maximum contribution in good years and not during more difficult years with the establishment of proper contribution percentage rates in both plans.
Deferred Compensation Plan	Type of Non-Qualified Plan also referred to as SERPS (Supplemental Employee Retirement Plans) used in instances where an employer wants to provide supplementary compensation for key executives or employees and wishes to defer payment into the future.
Defined Benefit Plan	Type of retirement plan designed to provide a predetermined retirement benefit to employees or their beneficiaries, either in the form of a certain dollar amount or a specific percentage of compensation. The employee, the employer, or both may make contributions. Three basic types of defined-benefit plans, include: (1) Flat Benefit; (2) Unit Benefit; and (3) Variable Benefit Plans.
Defined Contribution Plan	Type of retirement plan that provides an individual account for each participant. The account receives a contribution based on a percentage of compensation, an allocation of earnings and expenses, and where applicable, an allocation of forfeitures. Contributions may be made by employers and employees.
Employer-Sponsored Plan	Includes qualified and non-qualified retirement plans.
ERISA	The basic law covering qualified retirement plans; it consolidates pertinent IRS and labor law provisions. (Employee Retirement Income Security Act of 1974)
ESOP	Type of Defined Contribution Plan where the employer's contribution takes the form of the company's own stock. (Employee Stock Ownership Plan)
Flat Benefit Plan	Type of Defined Benefit Plan in which all employee participants receive a flat dollar amount as long as a predetermined minimum years employment requirement has been met.
Golden Handcuffs	Non-Qualified Deferred Compensation Plan that involves an agreement between employer and their key employees through which the key employees are paid supplemental retirement benefits if they meet certain conditions. The traditional use of such a plan is to motivate key employees to remain with the company until a certain age and encourage long-term employment relationships.
Golden Parachutes	Non-Qualified Deferred Compensation Plan that involves an agreement between employer and their key employees through which the employer agrees to pay amounts (often in excess of usual compensation) to key employees if there ever is a change in the management control of the company.
Government-Sponsored Plan	The largest government-sponsored retirement plan is the Social Security plan.
Individual K Plan	Variation of 401(k) Plan that was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Plan increases the maximum aggregate amount that a small business owner may deduct for contributions to a qualified retirement plan.
IRA	Type of Defined Contribution Plan that is the most common personal retirement plan. Created under Section 408 of the Internal Revenue Code, individuals who qualify may invest a certain amount each year on a tax-deferred basis. (Individual Retirement Account)
Keogh	Type of Qualified Plan used by sole proprietors or for employees of unincorporated businesses that was created by the Self-Employed Individuals Tax Retirement Act, or "Keogh" Act of 1962. Four major variations of Keogh Plans, include: (1) Profit-Sharing; (2) Money Purchase Pension; (3) Combination; and (4) Defined Benefit Pension Plans. Also referred to as an HR 10 Plan.
Money Purchase Plan	Type of Defined Contribution Plan in which the amount of the contribution is specificed as a fixed percent of compensation and the employer must contribute that amount annually, regardless of profits. Also referred to as a 401(a) Plan created under Section 401(a) of the Internal Revenue Code.
Non-Qualified Retirement Plan	Plans that either do not meet the IRS Code or the ERISA requirements. The plans are funded by employers and are more flexible, but they do not have the tax benefits of qualified plans. Benefits are paid at the retirement age in the form of annuities, which are taxed as ordinary income tax, or in lump sum payments, which can be transferred into an IRA to defer taxes.
Paired Plan	Combination of two or more Defined Contribution Plans that may also also include a Defined Benefit Plan. Plans included must be standardized and have the same sponsoring employer or prototype plan sponsor.
PBGC	Federal agency created by ERISA in 1974 to guarantee benefits of defined benefit plans. Employers sponsoring Defined Benefit Plans pay premiums to PBGC. (Pension Benefit Guarantee Corporation)
Pension Plan	Type of Defined Benefit Plan that guarantees a specific amount to be paid out to the employee during retirement. The amount is calculated based on an employee's salary, years of service and a fixed percentage rate.
Profit Sharing Plan	Type of Defined Contibution Plan in which the employer makes substantial and recurring discretionary contributions based on an employee's current-year compensation.
Qualified Plan	Type of Defined Benefit and/or Defined Contribution Plan that meets the IRS Code and ERISA requirements, and receives special tax treatment. Plans allow employers to deduct annual allowable contributions for each employee participant; contributions and earnings on those contributions are tax-deferred until withdrawn for each employee participant.
Rabbi Trusts	Non-Qualified Deferred Compensation Plan in which amounts are transferred to an irrevocable trust to be held for the benefit of executive employees. Funds in the trust can still be reached by creditors of the company (i.e., bankruptcy).
Retirement Plan	Any tax-deferred plan established by an employer for its employees. Retirement plans may be qualified or non-qualified.
Roth IRA	Type of Individual Retirement Account designed primarily for people with qualified company retirement plans or whose income exceeds the deductibility limits of traditional IRAs.
Salary Reduction Plan	Variation on Defined Contribution Plan, with distinctive characteristics. Type of plan depends on the company or organization and may include: (1) 401(k) Plans (corporation or non-profit organization); (2) 403(b) Plans (educational, health care and non-profit tax-exempt organizations); (3) 457 Plans (city, state and municipality employers); (4) Thrift or Savings Plan (federal employees or employers of corporations that offer such a plan); and (5) SIMPLE Plans (employers with <100 employees who offer no other plan).
SAR-SEP	Allows employee deferrals and employer contributions, without Form 5500 filings. SAR-SEPs can not be adopted after 12/96 per the Small Business Job Protection Act of 1996.
SEP-IRA	Type of Defined Contibution Plan that takes the form of an IRA for all eligible employees. Employer contributions only. (Simplified Employee Pension Plans IRA)
SIMPLE IRA	Type of Defined Contribution Plan where small employers sponsor a plan which allows for employee salary deferrals and requires a minimum level of employer matching or non-elective contributions. IRA or 401(k) based plan created by the Small Business Job Protection of 1996.
Spousal IRA	Type of Individual Retirement Account that allows non-working spouses to fund an IRA, regardless of other spouse's retirement arrangements.
Stock Bonus Plan	Type of Profit Sharing Plan where contributions are made in the form of company stock.
Target Benefit Plan	Type of Defined Contribution Plan in which employers set a contribution formula designed to target a specific benefit at retirement (i.e., 50% of pay). Conceptually similar to a Defined Benefit Plan, however, the plan does not guarantee the amount in the employee's account at retirement. Employer contributions are required, not discretionary.
Thrift or Savings Plan	Type of Profit Sharing Plan in which contributions are made by both the employer and employee. Employer can match all or a percentage of the employee's contributions.
Top-Hat Plan	A Non-Qualified Deferred Compensation Plan that involves an unfunded plan maintained primarily to defer compensation to a select group of management or highly compensated employees. Special reporting and disclosure rules apply.
Unit Benefit Plan	Type of Defined Benefit Plan that provides a benefit based on either a percentage of compensation or a fixed dollar amount multiplied by the number of qualifying years of service.
Variable Benefit Plan	Type of Defined Benefit Plan that provides a benefit based on allocating units, rather than dollars as contributions to the plan. At retirement, the value of the units allocated to the retiring employee would be the proportionate value of all units in the fund.