Actual Contribution Percentage (ACP) test
An annual test that compares the average of the actual contribution percentages of highly compensated employees (HCEs) to that of non-highly compensated employees (NHCEs). Contributions include employee after-tax contributions and/ or matching contributions (excluding Roth contributions). Once individual contribution percentages are averaged for the two groups, the test is performed to determine whether a plan is discriminating in favor of HCEs.
Actual Deferral Percentage (ADP) test
An annual test in a 401(k) plan that compares the average of the actual deferral percentages of highly compensated employees (HCEs) to that of non-highly compensated employees (NHCEs). Once individual deferral percentages are averaged for the two groups, the test is performed to determine whether a plan is discriminating in favor of HCEs.
Adjusted Funding Target Attainment Percentage (AFTAP)
The AFTAP is a ratio of the defined benefit plan’s adjusted assets to its adjusted funding target. If a plan’s AFTAP falls below a certain specified percentage (depending on the type of limitation), then a plan sponsor must effect certain benefit restrictions and/or other events.
Annual Funding Notice
Basic information about the status and financial condition of the defined benefit pension plan, including the plan’s funding percentage, assets and liabilities, and a description of the benefits guaranteed by the Pension Benefit Guaranty Corporation.
Automatic Contribution Arrangement (ACA)
A defined contribution plan feature that allows an employer to auto- matically enroll an employee in its plan, once eligibility and plan entry dates are satisfied, unless the employee affirma- tively elects otherwise.
Defined Benefit Plan
Also known as a traditional pension plan, a defined benefit 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 the benefit through a plan formula that considers such factors as salary and years of service.
Defined Contribution Plan
A type of retirement plan in which the employer, employee or both 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. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock owner- ship plans and profit-sharing plans.
Department of Labor (DOL)
A U.S. federal bureau that has broad authority to regulate and enforce employment laws, including ERISA as it pertains to pension, welfare and other benefits programs provided by employers. The Employee Benefits Security Administration (EBSA) is the sub-department within the DOL that is primarily interested in pension plan regulations and enforcement.
Discretionary Plan Amendments
Changes made to a plan (e.g., plan design changes) that are not required by law or statute.
Eligible Automatic Contribution Arrangement (EACA)
A type of ACA that must uniformly apply the plan’s default contribution percentage to all employees after providing them a required notice. It may allow employees to withdraw automatic enrollment contributions (with earnings) by making a withdrawal election as required by the terms of the plan. Employees are 100% vested in their automatic enrollment contributions.
Employer Identification Number (EIN)
A number assigned to a plan sponsor by the Internal Revenue Service for the purpose of tax administration. With the EIN, publicly available plan information (such as the plan’s Form 5500 filing) is accessible information for plan participants.
Employer Plans Compliance Resolution System (EPCRS)
The IRS program that plan sponsors or administrators may use to correct mistakes made in connection with the plan. The Self Correction Program generally permits a plan sponsor to correct certain plan failures without contacting the IRS or paying any fee. The Voluntary Correction Program generally permits a plan sponsor to, at any time before an IRS audit, pay a fee and receive IRS approval for correction of plan failures. The Audit Closing Agreement Program generally permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under IRS audit.
Employee Retirement Income Security Act of 1974 (ERISA)
The law that sets standards of protection for individuals in most voluntarily established private-sector retirement plans. ERISA requires employers to administer retirement plans, including plan reporting, disclosures to participants and beneficiaries within certain time frames, minimum participa- tion and minimum vesting standards.
Excess Aggregate Contribution
The aggregate amount of the matching contributions and employee (after-tax) contributions made on behalf of the HCEs for a plan year, over the maximum amount of these contributions permitted under the ACP test’s contribution percentage requirement. If there is an excess aggregate contribution for a plan year, it must be corrected.
This is a term used to describe a group of employees who can be disregarded (if plan so provides) when determining if the plan satisfies minimum coverage, certain nondiscrimination tests and, for defined benefit plans, the minimum participation test.
Form 10 (Advance Notice of Reportable Events)
Requires submission of information relating to event, plan and controlled group for change in contributing sponsor or controlled group, liquidation, loan default, transfer of benefit liabilities and various other events. This requirement applies to privately held controlled groups with plans having aggregate unfunded vested benefits over $50 million and an aggregate funded vested percentage under 90 percent. You should consult with your plan’s actuary regarding whether your plan qualifies for a waiver.
Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.)
The form, filed with the IRS, is completed for each individual who received a distribution of $10 or more from profit-sharing or retirement plans, et cetera.
Form 5330 (Return of Excise Taxes Related to Employee Benefit Plans)
The form is used to report and pay the excise tax on certain prohibited transactions related to employee benefit plans, including the late deposit of employee contri- butions and loan repayments withheld from pay.
Form 5500 Annual Return/Report of Employee Benefit Plan
An annual report, jointly developed by the IRS, DOL and Pension Benefit Guaranty Corporation, used by employee benefit plans to satisfy annual reporting requirements under the Internal Revenue Code and ERISA.
Form 8955-SSA (Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits)
The form is used to report information to the IRS about separated participants with deferred vested benefits under the plan. The IRS forwards this information to the Social Security Administration.
Internal Revenue Code (IRC)
A comprehensive set of tax laws created by the IRS that covers income taxes, payroll taxes, estate taxes, gift taxes and excise taxes.
Internal Revenue Service (IRS)
A federal agency respon- sible for administering and enforcing the IRC, as well as tax collection and tax law enforcement.
IRS 402(g) excess deferrals
Employee elective deferrals (for traditional and Safe Harbor plans) that exceed the IRC’s allowable limit for the calendar year ($18,000 in 2016). Generally, participants should aggregate all elective deferrals they make to all plans in which they participate to determine if the limits have been exceeded.
Pension Benefit Guaranty Corporation (PBGC)
Funded by the insurance premiums it collects and other investments, the PBGC insures and guarantees private sector workers’ defined benefit plan pensions.
Pension Protection Act of 2006 (PPA)
Pension reform law establishing new funding requirements for defined benefit plans as well as new requirements affecting cash balance plans, defined contribution plans and certain deferred compensation plans.
Qualified Automatic Contribution Arrangement (QACA)
An automatic contribution arrangement with special Safe Harbor provisions that, if all the requirements are met, exempt a 401(k) plan from ADP and/or ACP nondiscrimina- tion testing requirements.
Qualified Default Investment Alternative (QDIA)
If a QDIA meets certain criteria set forth under final regulations issued by the DOL, it can provide the plan fiduciary with a Safe Harbor for the investment of retirement plan contributions in the absence of investment direction by the plan participant.
Qualified Joint and Survivor Annuity (QJSA)
A type of retirement benefit paid as a life annuity (a series of payments, usually monthly, for life) to the participant and a survivor annuity over the life of the participant’s surviving spouse (or a former spouse, child or dependent who must be treated as a surviving spouse under a Qualified Domestic Relations Order) following the participant’s death.
Qualified Matching Contribution (QMAC)
A matching contribution that is fully vested when it is made to the plan and subject to certain distribution restrictions applicable to elective contributions regardless of whether it is taken into account for the plan’s ADP test.
Qualified Non-Elective Contribution (QNEC)
Contributions made by the plan sponsor to a participant’s account that meet certain vesting, distribution and nondiscrimination requirements.
Required Minimum Distribution (RMD)
The minimum amount a participant must withdraw from his or her retirement plan account each year, generally beginning at age 70½.
Safe Harbor Notice
Safe Harbor Plans (as defined below) are required to provide an annual notice to each defined contribution plan participant that discloses certain information related to the plan’s design, such as eligibility, vesting and the company contribution calculation.
Safe Harbor Plan
A type of plan under §§401(k) and 401(m) of the IRC, or for a §403(b) plan that applies the §401(m) safe harbor rules. This type of plan enables an employer to be exempt from certain plan testing in exchange for providing certain employer (or non-elective) contributions to plan participants, provided certain conditions are met. Prior to 2016, mid-year changes were available under limited circumstances. With Notice 2016-16, the IRS now permits almost all mid-year changes, provided certain notice and election opportunity conditions are satisfied and the change is not a prohibited change.
Summary Annual Report (SAR)
An annual disclosure statement for ERISA plan participants in narrative form that summarizes the defined contribution plan’s latest annual report on the sponsor’s Form 5500.
Summary of Material Modification (SMM)
Describes material modifications to a plan and changes in the information required to be in the Summary Plan Description (SPD). The SMM must generally be delivered to ERISA plan participants and ERISA pension plan beneficiaries receiving benefits. Distribution of an updated SPD satisfies this requirement.
Summary Plan Description (SPD)
A disclosure document that informs participants and beneficiaries about their plan and how it operates. The SPD must be written for the average participant and be sufficiently comprehensive to apprise covered persons of their benefits, rights and obligations under the plan.