401k Plan
A 401(k) plan is a type of Defined Contribution Pension Plan that enables employees to make contributions to the plan before taxes. Contributions made to the plan reduce the employees taxable income while saving for retirement. Contributions and earnings thereon are not taxed until they are withdrawn from the plan.
403b Plan
A 403(b) plan, commonly referred to as a "tax sheltered annuity plan," is a type of Defined Contribution Pension Plan available only to employees of educational and charitable organizations, which enables such employees to make contributions to the plan before taxes.
Defined Benefit Plan
Defined benefit (DB) plans define the retirement benefit that is ultimately paid to a participant. Typically, a participant will accrue a benefit (usually a fixed percent of compensation, or fixed dollar amount) for each year of credited service. The total benefit accruals at a participant’s retirement date can then be paid out in the form of an annuity (such as a single life or joint and 50% survivor annuity). In lieu of an annuity, a participant can elect to receive an actuarially equivalent single sum benefit.
Defined Contribution Plan
Defined contribution (DC) plans, also known as individual account plans, define the contribution a participant receives under the plan. The Employer contributions are allocated to individual accounts maintained for each participant within the plan. The total contributions plus total investment earnings of the participant’s account is the participant’s retirement benefit from the plan. The participant bears the investment risk in a DC plan.
An Enrolled Actuary is any individual who has satisfied the standards and qualifications as set forth in the regulations of the Joint Board for the Enrollment of Actuaries and who has been approved by the Joint Board to perform actuarial services required under the Employee Retirement Income Security Act of 1974 (ERISA).[1]
Employee Stock Ownership Plan
A qualified defined contribution plan in which plan assets are invested primarily or exclusively in the securities of the sponsoring employer
Flexible Spending Account
A benefit offered to an employee by an employer which allows a fixed amount of pre-tax wages to be set aside for qualified expenses. Qualified expenses may include child care or uncovered medical expenses. The amount set aside must be determined in advance and employees lose any unused dollars in the account at year-end.
Health Plans
Health plans refer to insurance coverage such as life, medical, dental and disability.
Maximum Compensation Limit
Maximum compensations apply to a variety of plans. See Caps and Maximum Compensation Limits for more information.
Money Purchase Plan
A type of defined contribution plan in which the employer's contributions are determined by a specific formula, usually as a percentage of pay. Contributions are not dependent on company profits.
Non Qualified Deferred Compensation Plan
A plan subject to tax, in which the assets of certain employees (usually Highly Compensated Employees) are deferred. These funds may be reached by an employer's creditors.
Participant Loans
A participant loan is a loan initiated by a participant against their qualified retirement plan. It is possible to initiate a loan provided the plan document contains a participant loan provision. The maximum amount that a participant may borrow from a plan is generally 50% of their vested account balance, but not more than $50,000. Loans must be charged a competitive interest rate (usually Prime Rate plus 1%). Loans must be repaid over a period, not to exceed five years, unless the loan is being used to purchase a primary residence. In that case, loans may be repaid over a longer period of time.
Profit Sharing Plan
Profit Sharing Plans enable an Employer to provide employees with a retirement plan by linking a discretionary contribution to company profits. Profit sharing contributions can be made in a variety of ways, a percent of compensation, a flat dollar amount, and the contribution may or may not be integrated with social security.
Reportable compensation
The compensation that determines retirement benefits and contributions. For
corporations, it is W-2 compensation. S-Corp. distributions
are not includable.
For partners in a partnership, it is K-1 earned income. Unearned
income (such as interest, dividends, royalties, etc.) are not
includable.
For a sole proprietor, it is Schedule C income.
Tax qualified
The U.S. Government gives tax qualified status to pension plans that meet the following criteria:
- contributions made by the sponsoring Employer to the plan are tax deductible
- investment earnings within the trust are tax deferred
- contributions plus any investment earnings become taxable to a participant only when the participant receives a distribution from the plan; a participant can continue to defer any taxes by electing a direct rollover to an IRA or another qualified retirement plan
[1] Definition from the Internal Revenue Service, "Enrolled Actuary Information," IRS Website. Available at http://www.irs.gov/taxpros/actuaries/article/0,,id=97441,00.html.