Actual Contribution Percentage Test (ACP Test)
A test to determine whether matching contributions and employee after-tax contributions made on behalf of employees discriminate in favor of highly compensated employees. To perform the test, the average contribution percentage for highly compensated employees for a plan year is compared to the average contribution percentage for nonhighly compensated employees for the same plan year or for the prior plan year, depending on whether the plan is using the current year testing method or the prior year testing method.
Actual Deferral Percentage Test (ADP Test)
A test to determine whether elective deferrals made on behalf of employees discriminate in favor of highly compensated employees. To perform the test, the average deferral percentage for highly compensated employees for a plan year is compared to the average deferral percentage for nonhighly compensated employees for the same plan year or for the prior plan year, depending on whether the plan is using the current year testing method or the prior year testing method.
Advisory Letter
A written statement issued by the Internal Revenue Service to a volume submitter practitioner or volume submitter mass practitioner as to the acceptability of the form of a specimen plan and any related trust or custodial account under 401(a).
Affiliated Service Group
Any group consisting of a service organization first organization and one or more of the following: (1) any service organization (an organization whose principal business is the performance of services) which is a shareholder or partner in the first organization and regularly performs services for the first organization or is regularly associated with the first organization in performing services for third persons and (2) any other organization if it is performing a significant part of its services for either the first organization or for any service organization described in (1) which are of a type historically performed by employees and 10 percent or more of the interests in such organization are held by persons who are highly compensated employees of the first organization or of the organization described in (1).
Annual Additions
The sum of all contributions and forfeitures, including elective deferrals and employee aftertax contributions, made to a participants account(s) for a year. The term does not include investment earnings, loan repayments, rollovers and trustee to trustee transfers.
Audit CAP
A program under the Employee Plans Compliance Resolution System. The program is available to plans under examination, allowing them to correct an error by making correction and paying a sanction.
Automatic Contribution Arrangement
A feature in a plan whereby a covered employeeƘőƖƀs compensation is reduced by an amount specified in the plan and contributed to the plan on the employeeƘős behalf unless the employee makes an affirmative election to have a different amount or no amount contributed to the plan. In the case of a 401(k) plan with an automatic contribution arrangement, the amounts withheld from employees compensation are contributed to the plan as elective deferrals and the percentage of compensation contributed is called the default deferral rate.
Average Contribution Percentage
The average contribution percentage is the average, expressed as a percentage, of the contribution ratios for a group of employees, either highly compensated employees or nonhighly compensated employees. An employeeƗĴs contribution ratio is the sum of matching contributions and employee after-tax contributions made for the employee for a plan year divided by the employeeƗĴs compensation for the year.
Average Deferral Percentage
The average deferral percentage is the average, expressed as a percentage, of the deferral ratios for a group of employees, either highly compensated employees or non-highly compensated employees. An employeeƘős deferral ratio is the elective deferrals made for the employee for a plan year divided by the employeeƘős compensation for the year.
Allocation
The employer’s contribution to a defined contribution plan.
Alternate Payee
A person other than a plan participant who, under a domestic relations order, has a right to receive all or some of a participant’s pension benefits.
Annual Report
A document filed annually with the IRS that reports pension plan information for a particular year, including such items as participation, funding, and administration.
Automatic Enrollment
The practice of enrolling all eligible employees in a plan and beginning participant deferrals without requiring the employees to submit a request to participate. Plan design specifies how these automatic deferrals will be invested. Employees who do not want to make contributions to the plan must actively file a request to be excluded from the plan. Participants can generally change the amount of pay that is deferred and how it is invested.
Basic Matching Contribution
A type of safe harbor 401(k) plan contribution. It is a qualified matching contribution equal to the sum of 100% of the participantƗĴs elective deferrals that do not exceed 3% of compensation and 50% of the participantƗĴs elective deferrals that exceed 3% of compensation but not 5% of compensation.
Bundled Plan
A 401k package which includes all investment, administration, education, and record keeping that is sold as one unit. This is in contrast to a basic 401k plan where the plan sponsor can individually hire each component provider separately.
Cash Balance Plan
A type of defined benefit plan that describes a participantƗĴs accrued benefit as a hypothetical account balance or a single-sum amount.
Catch-up Contribution
An elective deferral that exceeds a statutory or plan limit (such as the 402(g) limit) but which is permitted under 414(v) by participants aged 50 or over, provided they have sufficient compensation for the year to make the additional deferral. This additional deferral is limited to $5,500 for 2011.
Company
The business that sponsors the 401(k) plan.
Controlled Group
A group of trades or businesses (employers) that are related through ownership. A controlled group of employers is either (1) one or more chains of employers connected through ownership with a common parent employer where at least 80% of each employer, other than the common parent, is owned by one or more of the other employers and the common parent owns at least 80% of one or more of the other employers (parent-subsidiary controlled group) (2) two or more employers where five or fewer common owners satisfy an 80% common ownership test and a 50% identical ownership test (brother-sister controlled group) or (3) three or more employers where each employer is in either a parent-subsidiary controlled group or a brother-sister controlled group and at least one of the employers is the common parent employer in a parent-subsidiary controlled group and is also in a brother-sister controlled group (combined group).
Corrective Distribution
A distribution of funds from the plan to correct a nondiscrimination test or to correct a contribution in excess of a statutory limitation.
Current Year Testing Method
Method of performing the ADP test and ACP test where the highly compensated employeesƘő average deferral percentage and average contribution percentage for a plan year are compared to the non-highly compensated employees average deferral percentage and average contribution percentage for the same plan year.
Cliff Vesting
A 401k plan with Cliff Vesting vests 100% of employer contributions after a specified number of years of service. After three years of service, benefits must be fully vested.
Compliance Testing
Testing required by the IRS to make sure that the 401k plan is fair to both highly compensated and ordinary employees.
Conversion
The process of changing from one service provider to another.
Default
A failure to repay a plan loan in accordance with the provisions specified in the plan document. The document must identify the events that constitute the failure and the parameters for any grace period.
Default Deferral Rate
In the case of an automatic contribution arrangement in a 401(k) plan, the percentage of compensation, specified in the plan, withheld automatically from a covered participantƗĴs compensation (unless the participant elects otherwise) and contributed to the plan as an elective deferral.
Defined Benefit Plan
A plan under which each participants benefits are not held in separate accounts, but instead, a formula stated in the plan provides for definitely determinable accrued benefits.
Defined Contribution Plan
A plan which provides for an individual account for each participant. Benefits are based on the amount contributed to the participants account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.
Designated Roth Contribution
An elective deferral designated as a Roth contribution when contributed to the plan and which is not excludable from gross income.
Determination Letter
A written statement issued by the Internal Revenue Service to an employer as to the acceptability of the form of a specific plan and any related trust or custodial account satisfying the tax-qualification requirements under 401(a) and related sections.
Direct Foreign Investment
An investment made directly in a foreign country. The term includes bank accounts, investment accounts, foreign securities, and other foreign investments. The term includes only direct investments (e.g., foreign investments through a U.S. mutual fund are not included).
Direct Rollover
A rollover made from one plan to another plan without being distributed to the participant
Discretionary Match
A matching contribution permitted under the terms of the plan but not required. The plan sponsor can choose whether or not to make a discretionary match on a year-by-year basis. The plan sponsor can also choose the amount of the match that will be made.
Diversification Notice
A written notice provided to plan participants that informs them of their right to sell the employer stock in their accounts.
Deemed IRA
The Deemed IRA was part of The Economic Growth and Tax Reconciliation Act of 2001, although the concept has been around since the early 1980’s. If a 401k plan adopts this provision, for plan years beginning on or after January 1, 2003, a 401k plan may allow employees to make voluntary employee contributions to a Deemed IRA which is a separate account established under the plan.
Discrimination Testing
All tax qualified retirement plans must be administered in compliance with several regulations to meet Internal Revenue Service guidelines, every tax qualified retirement plan, like a 401k, must pass a series of numerical measurements each year. These include the ADP Test , ACP Test , Multiple Use Test and Top-heavy Test. Typically, doing these tests is called discrimination testing.
Distributions and Withdrawals
When money is withdrawn from a 401k plan, the withdrawal is referred to as a distribution. 401k plan assets can be withdrawn without penalty after age 59 1/2. Employees are required to begin taking distributions after age 70 1/2.
Defined Benefit Plan
A retirement plan in which the sponsoring company provides a certain benefit to participants based on a pre-determined formula.
Disclosure
Certain types of information plan sponsors must provide plan participants to access certain types of information, including the summary plan descriptions, summary of material modifications, and summary annual reports.
Elective Deferral
An amount elected by a participant to be contributed to a plan, thereby deferring the receipt of the cash as income. Elective deferrals can be either pre-tax elective deferrals or designated Roth contributions.
Eligible Automatic Contribution Arrangement (EACA)
A type of automatic contribution arrangement that may be included in a 401(k) plan. Under the feature, a participant may elect to receive a one-time distribution of elective deferrals withheld under the automatic contribution arrangement. The arrangement must satisfy a uniformity requirement and a notice requirement. This arrangement is described in Internal Revenue Code section 414(w).
Employee
A common-law employee of the company that sponsors the 401(k) plan responding to this questionnaire. An employee also includes certain leased employees.
Employee After-tax Contribution
A contribution made by an employee that is designated or treated as an after-tax contribution (other than a designated Roth contribution) when made to the plan and that is allocated to an individual account to which attributable earnings and losses are allocated.
Employee Plans Compliance Resolution System (EPCRS)
The program used by the Internal Revenue Service to correct plan errors. The program consists of the voluntary correction program, the self-correction program and audit CAP.
Employee Stock Ownership Plan
A defined contribution plan comprised either of a stock bonus plan or of a combined stock bonus and money purchase pension plan which is designed to invest primarily in employer stock.
Employer
The company that the employees covered by a plan work for. Note that this definition does not include employees of members of the controlled group if not covered by the Plan.
Employer Stock
Stock of the company that sponsors the plan, its subsidiary or other member of its controlled group or affiliated service group.
Enhanced Matching Contribution
A matching contribution under a safe harbor 401(k) plan that provides each participant with a matching contribution that is greater than the basic matching contribution.
EPCRS Revenue Procedure
Revenue Procedure 2008-50, which describes the EPCRS program and provides the rules and procedures for using the program.
Excess Benefit Plan
A non-qualified deferred compensation arrangement designed solely to provide benefits in excess of the Internal Revenue Code 415 limits.
Employer Matching Contribution
The amount that an employer contributes to the employee’s 401k account. Matching contributions are usually configured to provide a set percentage of an employee’s contribution up to a fixed limit.
Frozen
A plan under which accruals and/or contributions have ceased but assets are still held for participants and beneficiaries.
Fixed Match
A matching contribution that is specifically provided for in the plan document and that must be contributed each year unless and until the plan is amended.
Fiduciary
An individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. A person who exercises any discretionary authority or control over the management of a 401k retirement plan or its assets. A fiduciary is to act solely in the interest of plan participants and their beneficiaries.
Fiduciary
An individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. A person who exercises any discretionary authority or control over the management of a 401k retirement plan or its assets. A fiduciary is to act solely in the interest of plan participants and their beneficiaries.
Form 1099R
A form sent to the recipient of a plan distribution and filed with the IRS listing the amount of the distribution.
Form 5500
A form which all qualified retirement plans must file annually with the IRS.
Guaranteed Investment Contracts (GICs)
Accounts with an insurance company at a fixed rate of interest.
Hardship Distribution
An in-service distribution from the plan which is made because the participant has suffered severe financial difficulty or an extraordinary event as defined by the plan document. In order to make hardship distributions from a plan, the plan must provide for such distributions.
Highly Compensated Employee
An employee who (1) owned more than 5%of the employer at any time during the year or the preceding year or (2) in the preceding year, had compensation from the employer in excess of $95,000 (if the preceding year is 2005, $100,000 if the preceding year is 2006 or 2007) and, if the employer so chooses, was in the top 20% of employees when ranked by compensation as defined by Internal Revenue Code 415(c)(3).
In-kind Distribution
A distribution from the plan that distributes a plan asset instead of cash to the participant. For example, if a participant requests a distribution and receives Company ABC stock instead of cash, this would be an in-kind distribution.
In-service Distribution
A distribution that is paid to a participant while he or she is still employed by the plan sponsor.
Installment Payments
A series of equal payments from the plan made to a participant or beneficiary until exhaustion of the account balance
Involuntary Cash-out
An amount that may automatically be distributed from the plan in a lump sum upon the participantƗĴs termination or retirement if it does not exceed a certain dollar amount.
Key Employee
An employee who at any time during the plan year is one of the following: (1) an officer of the employer having an annual compensation greater than $140,000 in the case of the 2006 plan year; $145,000 in the case of the 2007 plan year; and $150,000 in the case of the 2008 plan year; (2) a 5% owner; or (3) a 1% owner having an annual compensation from the employer in excess of $150,000.
Leased Employee
An individual who is not a common-law employee of the business for which he or she performs services and who (1) provides services to the business pursuant to an agreement between the business and a leasing organization (2) has performed services for the business or any related entity on a substantially full-time basis for a period of at least 1 year and (3) performs such services under the primary direction or control of the business.
Life Annuity
A series of payments, payable at least annually, for the life of the participant, with no benefits payable after the participants death.
Lump Sum
The distribution, in a single payment, of a participants entire vested accrued benefit under the plan (or what remains of the participants vested benefit at the time of the single-sum distribution).
Master/Prototype Plan
A master plan is a plan that is made available by a sponsor for adoption by employers and for which a single funding medium is established for use by all adopting employers. A prototype plan is a plan that is made available by a sponsor for adoption by employers and under which a separate funding medium is established for each adopting employer.
Matching Contribution
Employer contributions that are made on account of elective deferrals or employee after-tax contributions.
Minimum Contribution
A contribution required to be made to a plan in any year in which it is determined to be top-heavy.
Money Purchase Pension Plan
A money purchase pension plan is a defined contribution plan that is also a type of pension plan. A pension plan must provide for the payment of definitely determinable benefits over a period of years (usually life) after retirement. To satisfy the definitely determinable benefits requirement, a money purchase pension plan must provide a fixed contribution formula that is not subject to the employerƗĴs discretion and is not geared to the profits of the company.
Multiemployer Plan
A plan (1) to which more than one employer is required to contribute, (2) which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and (3) which satisfies other requirements imposed by the Secretary of Labor.
Multiple Employer Plan
A plan sponsored by two or more employers where at least two of the sponsoring employers are not members of the same controlled group.
Nonelective Contribution
An employer contribution to a qualified plan that is neither an elective deferral nor a matching contribution (e.g., a discretionary profit-sharing contribution).
Non-highly Compensated Employee
An employee who is not a highly compensated employee.
Non-key Employee
An employee who is not a key employee.
Nonqualified Deferred Compensation Arrangement
An arrangement, other than a tax qualified plan, under which compensation of an employee is deferred to a later taxable year. The term is not intended to include arrangements that are excepted from Internal Revenue Code section 409A.
Nonresident Alien
An employee who is not a citizen of the United States and has not met either the green card test or the residency test under Internal Revenue Code section 7701(b) and who receives no U.S. source income from the employer.
Nonstandardized Master/Prototype
A master/prototype plan that is not a standardized plan. See the definition of standardized master/prototype plan.
Opinion Letter
A written statement issued by the Internal Revenue Service to a sponsor or master and prototype mass submitter as to the acceptability of the form of a master/prototype plan under 401(a) and, in the case of a master plan, the acceptability of the master trust under 501(a).
Participant
An employee who is eligible to either make contributions to the Plan or to share in employer contributions to the Plan.
Plan Trustee
The person who has exclusive authority and discretion to manage and control the assets of the plan named as such either in the trust document or appointed to the position.
Pre-approved Plan
A master, prototype or volume submitter document.
Primary Residence Loan
Loan used to acquire any dwelling unit which, within a reasonable time, is to be used as the principal residence of the participant.
Prior Year Testing Method
Method of performing the ADP test and ACP test in which the highly compensated employees average deferral percentage and average contribution percentage for a plan year are compared to the non-highly compensated employees average deferral percentage and average contribution percentage for the prior plan year.
Profit-sharing Plan
A defined contribution plan that provides a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance from employment.
Plan Vendor
Companies that administer, service and/or sell 401k plans. They are generally employed by the plan sponsor.
Qualified Automatic Contribution Arrangement (QACA)
A safe harbor 401(k) plan that is exempt from the ADP test and the ACP test and not subject to the top-heavy rules. It must provide for automatic contributions at a specified level and meet certain employer contribution, notice and uniformity requirements. The default deferral rate must be at least 3% initially, increasing by 1% each plan year until the rate is at least 6%. The default deferral rate cannot exceed 10% and it must be applied uniformly to all covered participants. The employer must make either a nonelective contribution of 3% of compensation to all participants or a matching contribution equal to the sum of 100% of the participants elective deferrals that do not exceed 1% of compensation and 50% of the participants elective deferrals that exceed 1% of compensation but not 6% of compensation.
Qualified Joint and Survivor Annuity
An annuity for the life of the participant with a survivor annuity for the life of the spouse that is between 50% and 100% of the amount of the annuity payable for the joint lives of the participant and spouse. If a participant is not married, the annuity is payable for that participants life.
Qualified Matching Contributions
Matching contributions that are fully vested when made to the plan and that are subject to the same distribution restrictions as elective deferrals (except for hardship).
Qualified Nonelective Contributions
Nonelective contributions that are fully vested when made to the plan and that are subject to the same distribution restrictions as elective deferrals (except for hardship).
Qualified Default Investment Alternative (QDIA)
An investment option a plan sponsor may use for 401k plan contributions in the absence of direction from a plan participant.
Recharacterized
A means of correcting a failed ADP test. Excess elective deferrals are treated as distributed from the plan and contributed as employee after-tax contributions subject to the ACP test.
Rollover
The transfer of a qualified plan distribution from one qualified plan or individual retirement arrangement to another qualified plan or individual retirement arrangement.
Roth 401k
A 401k feature that allows employees to make elective contributions on an after-tax basis. Withdrawals, generally after age 59, of any money from the account are tax-free.
Safe Harbor 401(k)
A type of 401(k) plan that is exempt from the ADP test and the ACP test and not subject to the top-heavy rules. The plan must meet certain notice and employer contribution requirements. The employer must make either a safe harbor nonelective contribution or a qualified matching contribution that is either a basic matching contribution or an enhanced matching contribution. For purposes of this questionnaire, a safe harbor 401(k) plan does not include a QACA or a SIMPLE 401(k) plan.
Safe Harbor Nonelective Contribution
A type of safe harbor 401(k) plan contribution. It is a qualified nonelective contribution equal to 3% of a participantƗĴs compensation.
Self-correction Program
One of the programs under the Employee Plans Compliance Resolution System that allows plans to correct insignificant errors without approval from the IRS.
SIMPLE 401(k) Plan
A type of 401(k) plan that provides for a lower limit on elective deferrals and certain mandatory employer matching or nonelective contributions. A SIMPLE 401(k) plan is deemed to satisfy the ADP and ACP tests.
Standardized Master/Prototype
A standardized master/ prototype plan is a master/prototype plan that provides an adopting employer with limited choices regarding coverage and benefit options. Following the planƗĴs terms, including any options provided under the plan document, will guarantee that the qualification requirements of the Internal Revenue Code are satisfied.
Stock Bonus Plan
A defined contribution plan established to provide benefits similar to those in a profit-sharing plan, except that benefits under the plan may be distributable in the stock of the employer.
Salary Reduction Plan (Cash or Deferred Arrangement)
A CODA is a defined contribution plan that allows participants to have a portion of their compensation contributed pre-tax to a retirement account on their behalf. They include 401k, 403b and 457 plans.
Service provider
A company that provides some type of service to a 401k plan, including managing assets, record keeping, providing plan education, and plan administration.
Target Benefit Plan
A type of money purchase pension plan providing a benefit formula known as the target benefit. The target benefit, used as the basis for determining the employerƗĴs annual contribution, is expressed in the same manner as a benefit formula under a defined benefit plan. The employerƗĴs contribution for a participant is determined using the target benefit formula and actuarial assumptions stated in the plan.
Term Certain Annuity
A benefit payout option that provides for a series of payments, payable at least annually, for a specified period of time.
Terminate/Termination
Cessation of the plan and distribution of its assets to participants. A facts and circumstances test is used to ascertain whether a plan has been terminated. For example, a plan is terminated when, in connection with the winding up of the employerņs trade or business, the employer begins to discharge his employees. A plan is not terminated merely because an employer sells or otherwise disposes of his trade or business if the acquiring employer continues the plan as a separate and distinct plan of its own, or consolidates or replaces that plan with a comparable plan.
Third-party Administrator
A party hired by a plan or its fiduciaries to aid in performing management and/or recordkeeping functions on behalf of the plan.
Triple Stacked Match
Provides for a safe harbor matching contribution, discretionary matching contribution and an additional fixed matching contribution, all of which satisfy the ADP and ACP safe harbors.
Unrelated Business Income
Gross income derived by an organization from: 1) any unrelated trade or business regularly carried on by it, or 2) debt financed property. An unrelated trade or business is any trade or business which in not substantially related to the purpose for which the organization is exempt from tax. Debt financed property is property purchased with borrowed money. If a plan has unrelated business income it may be required to file Form 990-T, Exempt Organization Business Income Tax Return.
Voluntary Correction Program
A program under the Employee Plans Compliance Resolution System that allows plans to submit an application and fee to the Internal Revenue Service in order to correct a plan error. This program is not available to plans under examination.
Vesting
The degree to which a participant is entitled to a portion of his or her account balance.
Volume Submitter Plan
A sample plan of a volume submitter practitioner.
Voluntary Correction Program
A program under the Employee Plans Compliance Resolution System that allows plans to submit an application and fee to the Internal Revenue Service in order to correct a plan error. This program is not available to plans under examination.