FAQ


Can you define some of these terms for me?

401(k)
A defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as, matching the employee’s contributions up to a certain percentage. Some 401(k) plans have mandatory employer contribution requirements.
403(b)
A tax-sheltered annuity plan, this is a retirement plan offered by public schools and certain tax-exempt organizations. An individual’s 403(b) annuity may be obtained from a variety of sources, depending on the plan’s ERISA or non-ERISA status. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and nonelective employer contributions. 403(b)s may be ERISA or non-ERISA plans and generally have more filing and legal requirements than in years past.
412(e)(3)
These plans have the same advantages as other defined benefit pension plans. They allow higher deductible contribution levels than other types of employer-sponsored retirement plans, and they provide a guaranteed retirement benefit to participants. They require the benefit to be funded by life insurance or annuities as opposed to other asset types allowed in Defined Benefit or Cash Balance plans.
Accredited Pension Administrator (APA)
A designation from the National Institute of Pension Administrators (NIPA) earned by the successful completion of four study courses and examinations covering all aspects of plan administration. The APA is maintained by annually completing 15 hours of continuing education and current NIPA membership. Potential APAs include pension administrators, retirement relationship managers and ERISA compliance specialists.
Actual Deferral Percentage/Actual Contribution Percentage Test (ADP/ACP Test)
An annual non-discrimination tests for 401(k) plans mandated by the IRS to ensure that a plan does not unduly benefit owners and highly compensated employees (HCEs) at the expense 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.
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 pay and interest credits, and each participant has a hypothetical account. Both Cash balance and traditional defined benefit plans may allow annuity or lump sum distributions.
Certified Pension Consultant (CPC)
A designation from the American Society of Pension Professionals and Actuaries (ASPPA). It is conferred by ASPPA to benefits professionals working in plan administration, pension actuarial administration, insurance, and financial planning. CPCs work alongside employers to formulate, implement, administer and maintain qualified retirement plans. Individuals with at least three years of retirement plan related experience may apply for the CPC credential. Applicants must demonstrate competence in specific areas of retirement and related employee benefits consulting through completion of the CPC examination series offered by ASPPA.
Circular 230 Preparer
Circular 230 is a document containing the statute and regulations detailing a tax professional’s duties and obligations while practicing before the IRS; authorizing specific sanctions for violations of the duties and obligations; and, describing the procedures that apply to administrative proceedings for discipline. In short, Circular 230 consists of the “rules of engagement” for tax practice. The underlying issue in all Circular 230 cases is the tax professional’s “fitness to practice” before the IRS.
Defined Benefit (DB)
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 Benefit Pension Plan
When participating in a defined benefit pension plan, an employer/sponsor promises to pay the employees/members a specific benefit for life beginning at retirement. The benefit is calculated in advance using a formula based on age, earnings, and years of service.
Defined Benefit Administrator Certificate
Issued by the American Society of Pension Professionals and Actuaries (ASPPA), the DBA certificate will provide the non-actuary with an understanding of the administration of a defined benefit plan, including the basics of determining contributions, the applicable deadlines, calculations for termination and retirement benefits, and other critically important aspects of these types of plans.
Defined Contribution (DC)
In a defined contribution plan, the employee and/or the employer contribute to the employee’s individual account under the plan. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. The contributions and earnings are not taxed until distribution. The value of the account will change based on contributions and the value and performance of the investments.. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
Department of Labor (DOL)
A U.S government cabinet body responsible for standards in occupational safety, wages and number of hours worked, unemployment insurance benefits, re-employment services and a portion of the country’s economic statistics.
Enrolled Actuary (EA)
An actuary who has been licensed by a Joint Board of the Department of the Treasury and the Department of Labor to perform a variety of actuarial tasks required of pension plans in the United States by the Employee Retirement Income Security Act of 1974 (ERISA).
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).
ESOP
A type of defined contribution plan that is invested primarily in employer stock.
Form 5500
The Form 5500 Series is an important compliance, research, and disclosure tool for the Department of Labor, a disclosure document for plan participants and beneficiaries, and a source of information and data for use by other Federal agencies, Congress, and the private sector in assessing employee benefit, tax, and economic trends and policies. The Form 5500 Series is part of ERISA’s overall reporting and disclosure framework, which is intended to assure that employee benefit plans are operated and managed in accordance with certain prescribed standards and that participants and beneficiaries, as well as regulators, are provided or have access to sufficient information to protect the rights and benefits of participants and beneficiaries under employee benefit plans.
Group Benefits Associate (GBA)
A designation indicating training in dealing with health or other group benefits.
Hybrid Plan
Combines features of defined benefit and defined contribution plans. Four common hybrid retirement plans include cash balance plans, target benefit plans, money purchase plans, and age-weighted profit sharing plans.
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.
Member of the Society of Pension Actuaries (MSPA)
This program was created for individuals providing defined benefit or actuarial consulting who are currently Enrolled Actuaries in good standing.
Money Purchase Plan
A money purchase plan requires set annual contributions from the employer to individual accounts and is subject to certain funding and other rules.
New Comparability 401(k) Plan
A new comparability plan is generally a profit sharing plan or a money purchase pension plan in which the contribution percentage formula for one category of participants is greater than the contribution percentage formula for other categories of participants. As with an age-based profit sharing plan, to satisfy the non-discrimination requirements, a new comparability plan is tested under the cross-testing rules. A new comparability plan must contain a definite predetermined formula for allocating contributions made to the plan among the participants.
Pension Actuary
Actuaries evaluate the possibility of different scenarios and mathematically quantify the different outcomes to create the optimal result. For pension actuaries, the same applies, but for pensions. They must use elaborate data about life expectancy, retirement age, health care costs and other information to quantify pension obligations. They must then estimate the amount of funding from current employees and the estimated investment income. Using these two sides of the ledger, pension actuaries can estimate the pension shortfall or surplus.
Pension Benefit Guarantee Corporation (PBGC)
The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency that was established in 1974 to protect the benefits of participants in private-sector defined benefit pension plans. The PBGC runs two insurance programs: a single-employer program and a multi-employer program. Single-employer pension plans are plans to which one employer makes contributions. Multi-employer pensions are collectively bargained pension plans to which more than one employer contributes. The single-employer program is the larger of the two insurance programs.
Profit Sharing Plan
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.
Retirement Plans Associate (RPA)
A designation for those who work with DB and DC plans. It covers how to design and manage retirement plans.
Roth 401(k)
An employer-sponsored investment savings account that is funded with after-tax money. After the investor reaches age 59.5, withdrawals of any money from the account (including investment gains) are tax-free.
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)
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.
Schedule SB
The Schedule SB is part of the IRS Form 5500 and provides the actuarial information for the plan sponsor’s defined benefit or cash balance plan.
Simplified Employee Pension Plan (SEP)
A plan in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it is not subject to the reporting and disclosure requirements of most retirement plans. Under a SEP, an IRA is set up by or for an employee to accept the employer’s contributions.
Stacked Hybrid Plans
Instead of “parallel” plans where employees contribute to both a 401(k) and a defined benefit plan from the first dollar of earnings, “stacked” plans would maintain the defined benefit plan as a base and provide defined contribution coverage for earnings above some cutoff. The advantage of the “stacked” approach is that it allows employees with modest earnings to receive the full protection of a defined benefit plan.
Third Party Administrator (TPA)
Retirement plans such as a 401(k) are often partly managed by an investment company. Instead of handling all the plan contributions by employees, distributions to employees, and other aspects of plan processing, the investment company may contract with a third-party administrator to handle much of the legal, compliance and regulatory work and only handle the remaining investment work.
Traditional DB
A traditional pension plan that defines a benefit for an employee upon that employee’s retirement is a defined benefit plan. The most common type of formula used is based on the employee’s terminal earnings (final salary).