ERISA Cavalry PLLC

Employee benefits law, like most other nooks and crannies of the legal system, has its own jargon, some of it nonintuitive. This page defines many of the most commonly encountered terms. Some nuances are necessarily omitted; complete and accurate definitions of every term would consume millions of pixels. Readers should feel free to request additional definitions .
 

Accrued benefit: (1) (Defined benefit plan) The retirement benefit that a participant has earned as of any particular point in time. A "traditional" defined benefit formula expresses the benefit in the form of an annuity commencing at the plan's normal retirement age. The amount of the benefit is typically based on years of participation in the plan and average compensation over some period, such as the final five years of participation. The accrued benefit is sometimes offset by a portion of anticipated Social Security benefits or by other factors.

 

(2) (Defined contribution plan): A participant's account balance.

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Active participant: (Individual retirement accounts and annuities) An IRA owner who participates in an employer-sponsored qualified plan, 403(b) plan, Simplified Employee Pension, SIMPLE Retirement Plan or funded governmental retirement plan (other than an eligible deferred compensation plan). An active participant’s ability to deduct contributions to his IRA is phased out as his adjusted gross income rises. The criteria for “active participant” status depend on the type of plan:

• Defined benefit plans: An IRA owner is an active participant for a calendar year if, at any time during that year, he has satisfied the age and service conditions for eligibility to participate, is included in the class of employees who can accrue benefits under the plan and has reached the plan entry date, regardless of whether he actually accrues a benefit during the year and even if he terminates employment without a vested benefit. Exception: If the plan year is not the same as the calendar year, active participant status is based solely on the portion of the plan year that ends within the calendar year. If the plan year ends on June 30, 2023, someone who becomes a participant on July 1, 2023, is not an active participant for the 2023 calendar year.

• Defined contribution plans: An IRA owner is an active participant for a calendar year if employer contributions, employee contributions or forfeitures are allocated to his account during that year. Contributions that are required by law or by the terms of the plan are deemed to be made on the last day of the plan year to which they relate, discretionary contributions on the day on which they are in fact remitted to the plan. Exception: If the plan year is not the same as the calendar year and discretionary contributions for two plan years are made in a single calendar year, contributions for the later plan year are treated as if made in the following calendar year. (The purpose of this rule is to prevent an employer with a fiscal year plan from timing contributions so as to allow employees to make deductible IRA contributions in every second year even though they receive employer contributions every year.)

Actual contribution percentage test (a/k/a ACP test); The basic nondiscrimination test for matching contributions and employee contributions. It compares the sum of those contributions for highly compensated employees, as a percentage of compensation, to the corresponding contributions for other plan participants. The testing procedure is generally the same as for the ADP test. Test failures may be corrected through refunding excess aggregate contributions to HCEs, increasing the matching contribution rate for nonhighly compensated employees, making qualified nonelective contributions to the accounts of nonhighly compensated employees, or including elective contributions in the ACP test rather than the ADP test. SIMPLE IRA plans and SARSEP's are exempt, and safe harbors are available for 401(k) plans and 403(b) plans.

Actual deferral percentage test (a/k/a ADP test): The basic nondiscrimination test for 401(k) plans. It compares the elective deferrals of highly compensated employees, as a percentage of compensation, to the deferrals of other plan participants. If the former exceeds the latter by more than a specified margin (two percentage points in most circumstances), the plan fails the test. The failure can be corrected by refunding elective deferrals to HCE's, making qualified nonelective contributions to the accounts of nonhighly compensated employees, or including qualified matching contributions in the ADP test rather than the ACP test. Various "safe harbor" contribution formulas (calling for at least a minimum level of matching contributions or nonelective contributions for nonhighly compensated employees) are available to avoid ADP testing. The ADP test doesn't apply to 403(b) plans (see universal availability rule), SIMPLE IRA plans or SARSEP's. 

Annual addition: The amount allocated to a defined contribution plan account for a particular year, including employer and employee contributions and the account's share of forfeitures incurred by other participants (along with some rare items that need not be mentioned here) but excluding investment gains and losses. The total annual additions to a participant's account in any year may not exceed the lesser of an indexed dollar amount ($66,000 for plan years ending in 2023, $69,000 for years ending in 2024) or 100 percent of his compensation (before subtracting elective deferrals and pre-tax contributions to cafeteria plans and some other items).

Automatic contribution arrangement: A 401(k) plan or 403(b) plan under which elective deferrals equal to a specified percentage of compensation are deducted by default from the pay of eligible employees who don't make a different election. See "eligible automatic contribution arrangement" and "qualified automatic contribution arrangement".

Cafeteria plan: An arrangement under which an employee may make pre-tax contributions to a plan providing health, dependent care or other welfare benefits. The most familiar are "flexible spending accounts": Contributions credited during the year are excluded from W-2 wages, and the funds thus set aside may be used to pay medical expenses incurred during the year or within a specified time afterward. No interest is credited to the contributions, and they are lost if not timely used. 

Cash or deferred arrangement (a/k/a CODA): A defined contribution plan feature that allows participants to elect between current compensation and elective contributions to the plan. (See elective deferral.) The ability to elect under a CODA doesn't result in constructive receipt of income if the conditions for a qualified cash or deferred arrangement are satisfied.

 

Cash balance plan: A defined benefit plan in which accrued benefits are expressed in the form of a notional account balance. The account balance is credited each year with a "pay credit" (typically a percentage of compensation, often varying with years of participation in the plan) and interest on the accumulated balance. Cash balance plans are the most common type of hybrid plan.

Catch-up contribution: An elective deferral in excess of the normal dollar limitation that is allowed to participants who are at least 50 years old at the end of a calendar year. In 2023, the maximum catch-up is $7,500 ($3,500 for SIMPLE IRA plans). Hence, someone who is at least age 50 on December 31, 2023, will be able to defer up to $30,000 in that year. Catch-up contributions are exempt from the limitation on annual additions and from the ADP test.

 

Church plan: A plan maintained by a church, an association of churches or an employer controlled by or associated with a church. (See IRC §414(e).) The controversies concerning the perimeters of that definition are beyond the scope of a glossary. Church plans are exempt from ERISA, and many plan qualification rules, unless they affirmatively elect ERISA coverage. Plans making that election are fall under the same regime as non-church plans. In some contexts, "church plan" has a narrower meaning, referring only to primary church functions and excluding church-associated organizations that furnish goods and services to the public for compensation, such as schools and hospitals.

Compensation: A term whose meaning varies with the context. For many purposes, it includes taxable wages (or net earnings from self-employment) plus elective deferrals, pre-tax contributions to cafeteria plans and some other items.

Controlled group: The employer that maintains a plan and all trades or businesses that it controls, is controlled by or is under common control with. The rules for determining common control are found in section 414(b) and (c) of the Internal Revenue Code. As a general, though not absolutely unvariable, rule, ERISA and the Code treat all members of a controlled group as a single entity.

Deferred compensation: (1) ERISA: compensation whose receipt is deferred to the termination of employment or beyond. As a rule of thumb, compensation that is deferred for no longer than three to five years is not deferred compensation within the meaning of ERISA.

 

(2) Internal Revenue Code: the deferral of compensation for more than a brief period (generally 2½ months) after the end of the year in which a service provider first has a vested right to it. The general rule is that deferred compensation is taxable upon actual or constructive receipt, unless the services are performed for a tax-exempt organization (in which case taxation takes place upon vesting) or the arrangement under which the deferred compensation is paid fails to comply with section 409A.

Defined benefit pension plan (a/k/a defined benefit plan, DB plan): Defined in ERISA and Internal Revenue Code as any plan that is not a defined contribution plan. A "traditional" defined benefit plan calculates benefits in a "normal form" (typically a life annuity) commencing at the plan's normal retirement age, based on average compensation over some period of years, length of service and sometimes other factors. A variant known as a "cash balance plan" establishes hypothetical "accounts" for participants. Credits (usually equal to a percentage of compensation) are added to the accounts each year, and interest is credited to them. A participant's benefit equals his account balance. Other methods for determining benefits also exist but are much rarer. A key point is that benefits are not linked to the plan's investment performance.

Defined contribution plan (a/k/a individual account plan, DC plan): Contributions to the plan are allocated to individual accounts for participants. The accounts are invested, with gains and losses credited to the accounts. A participant's benefit is the balance in his account. 

 

Direct rollover: A rollover that is accomplished by direct transfer between plans or IRA's without any possession by the individual entitled to the distribution. Rollover-eligible distributions that are not directly rolled over are subject to mandatory federal income tax withholding at a 20 percent rate.

Discrimination: In qualified plans, either (1) coverage by the plan of too large a proportion of highly compensated employees in relation to the employer's total work force (see IRC §410(b)) or (2) contributions or benefits that are more favorable to highly compensated employees than permitted by section 401(a)(4) of the Internal Revenue Code.

Elective contribution: A contribution that an employer makes to a plan in response to a participant's elective deferral.

Elective deferral (a/k/a salary reduction contribution (now rare)): (1) An employee's election to receive an employer contribution to a 401(k) plan, 403(b) plan, SARSEP or SIMPLE IRA Plan in lieu of current compensation. If the deferral is carried out properly, the employee is not considered to be in constructive receipt of the compensation, and the employer's corresponding contribution is not currently included in taxable income. (See Roth contribution for an exception to noninclusion.) The amount that an individual may defer in a calendar year (aggregating all plans in which he participates) may not exceed an indexed ceiling (in 2023, $22,500 for taxpayers under age 50 as of December 31st, plus up to $7,500 in catch-up contributions for those who are older). For SIMPLE IRA plans, the limits are lower: $15,500 plus up to $3,500 catch-up contributions. (See also cash or deferred arrangement.) 

(2) A deferral of unfunded deferred compensation that is elected by a service provider. These elections are effective only if made before the beginning of the calendar year in which the compensation is earned.

Eligible automatic contribution arrangement (a/k/a EACA): An automatic contribution arrangement that (i) is identified as an EACA in the plan document and (ii) has the safe default rate of deferral of all participants with the same length of service. If a controlled group has more than one 401(k) or 403(b) plan, all plans identified as EACA's must have the same default percentage. An EACA has two advantages:

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• If the plan fails the ADP test, more time is allowed for correcting excess contributions via refunds to HCE's.

• Refunds of automatically deducted deferrals may be made to employees who request them within a 30 to 90 day window after the first deferral. This provision is intended to reduce the need for plans to hold small account balances for employees who have no desire to defer but didn't opt out before automatic contributions began.

Eligible deferred compensation plan (a/k/a 457(b) plan): A form of deferred compensation that is available only to government and tax-exempt employers and whose tax treatment resembles that of qualified plans. The rules for governmental and private sector plans differ in several respects. Most significantly, plans of non-government employers must be unfunded and, if the plan is subject to ERISA, may cover only "a select group of management or highly compensated employees", while plans of government employers must be funded and may be open to the entire work force.

Eligible individual account plan: A profit sharing plan or stock bonus plan that is exempt from ERISA's prohibition against holding employer stock in excess of 10 percent of plan assets. In general, all that is needed is a provision in the plan document allowing employer stock purchases in excess of the limitation.

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Eligible retirement plan: A plan that is eligible to receive rollovers. Eligible retirement plans include qualified plans, 403(b) plans, governmental eligible deferred compensation plans and individual retirement plans, although not all distributions can be rolled into all of them. For example, a distribution to a beneficiary other than a surviving spouse may be rolled over only to an individual retirement plan.

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Employee: (1) (ERISA) A common law employee. With limited exceptions, self-employed individuals (including partners, independent contractors and sole proprietors) are outside the purview of ERISA.

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(2) (Qualified plans) A common law employee or self-employed individual. Qualified plans that cover self-employed individuals are often referred to as "Keogh plans" or "HR-10 plans" after the principal sponsor of the legislation that authorized them and its bill number in the House of Representatives. Before 1983, they were subject to much more restrictive rules than plans for common law employees, but those differences were abolished, with trivial exceptions, by the Tax Equity and Fiscal Responsibility Act of 1982.

 

Employee contribution. An after-tax contribution (other than a Roth contribution) by an employee to an employer-sponsored plan. Elective deferrals are classified as employer rather than employee contributions. Employee contributions were once a common feature of both defined benefit and defined contribution plans. They are now rare except in plans of government employers. 

Employee Plans Compliance Resolution System (a/k/a EPCRS): The IRS's program for correcting defects in qualified plans, 403(b) plans, simplified employer pensions and SIMPLE IRA plans without disturbing their tax status. EPCRS consists of three sub-programs:
 

• Self-correction program (a/k/a SCP): The employer does what is needed to place the plan and participants in the same position as if the defect had not occurred and documents the correction. The IRS reserves the right to determine on audit that the correction is inadequate.

• Voluntary correction program (a/k/a VCP): The employer submits an application to the IRS describing the correction, along with a user fee based on the value of plan assets (currently $1,500 for assets of $500,000 or less, $3,500 for assets of more than $10,000,000, $3,000 for other plans). If the IRS approves the application, it will enter into a closing agreement with the employer.

• Audit closing agreement program (a/k/a Audit CAP): If the IRS detects a defect in an audit, it will offer the employer the opportunity to resolve it by making an acceptable correction and paying a negotiated sanction, usually considerably higher than the VCP user fee.

​For the details of EPCRS, see Revenue Procedure 2021-30. SECURE Act 2.0 liberalized eligibility for self-correction. Notice 2023-43 discusses the effect of the statutory changes.

Employee stock ownership plan (a/k/a ESOP): A stock bonus plan whose assets are invested primarily in employer stock and that complies with a set of statutory and regulatory requirements designed to ensure that the benefits of stock ownership are widely spread among employees. ESOP's were long a favorite of Congressional tax writers and enjoy a number of tax advantages over other qualified plans, though those benefits have been pruned since their heyday. Of key importance is the ability an ESOP to borrow funds from the employer or on the employer's guarantee for the purpose of buying employer stock. For other types of plans, an extension of credit by the employer is a prohibited transaction.

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Excess aggregate contributions: Employee contributions and matching contributions that, in the aggregate, result in a plan's failure to satisfy the ACP test. Perhaps the clunkiest term in employee benefits law.

 

Excess assets: See "residual assets".

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Excess contributions: (1) (401(k) plans) Elective deferrals that result in a plan's failure to satisfy the ADP test. Refunding excess contributions to highly compensated employees is a standard way to correct ADP test failures.

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(2) (IRAs) Contributions in excess of the maximum amount that may be contributed to the account. If the excess isn't withdrawn by the later of (i) the extended due date of the IRA owner's tax return for the year of the contribution or (ii) six months after the return's unextended due date, a six percent annual excise tax is imposed on the owner until he takes action to disgorge them or is able to fit them in under a later year's limitation.

 

Excess deferrals: Elective deferrals that exceed the limitation imposed by IRC §402(g). Excess deferrals may be withdrawn without penalty through April 15th of the calendar year following the year of deferral. They are included in taxable income in the year of deferral and, if not timely withdrawn, are included again when distributed by the plan. 

 

Flexible spending account: See "cafeteria plan".

 

Forfeiture: A participant's loss of all or part of his accrued benefit owing to his failure to satisfy the plan's vesting conditions. Forfeitures are retained by the plan. In a defined benefit plan, they effectively reduce the employer's contribution obligation. A defined contribution plan may apply them (i) to offset contributions that the employer would otherwise make (other than elective contributions, (ii) to increase the amounts allocated to participants' accounts, as if they were nonelective employer contributions or (iii) to pay plan expenses. Forfeitures must be utilized in some manner within 12 months after the end of the plan year in which they are incurred; they may not be carried over indefinitely in a suspense account. The IRS has enforced this requirement laxly in the past, but regulations proposed in February 2023 foreshadow change of posture. 

Funded: (1) Secured by assets that are set aside beyond the reach of creditors. A retirement plan is "funded" if creditors of the employer cannot obtain plan assets in order to satisfy claims against the employer. 

 

(2) Benefits under a funded plan that the plan has sufficient assets to provide if they were to become due immediately. All defined contribution plans are, by definition, fully funded at all times. Defined benefit plans may have assets that exceed or fall short of the value of their benefit liabilities. 

 

Governmental plan: A plan maintained by a federal, state or local government, by a government agency or instrumentality, or by an Indian tribe for its non-commercial functions. Given the wide variety of activities that governments engage in, it is often unclear when government end and the private sector begins. The IRS has spent years trying to draw the line, without having so far produced much useful guidance. Governmental plans are exempt from ERISA, and the requirements for governmental qualified plans are much lighter than for plans of other employers. 

 

Group trust (a/k/a 81-100 trust): A trust that pools assets of qualified plans, 403(b) plans, individual retirement accounts, and governmental eligible deferred compensation plans or welfare plans, where the participating plans have been established by unrelated employers. (Contrast "master trust".) The plans themselves are not pooled; the trust is strictly an investment vehicle and is classified as a separate qualified plan. The rules governing group trusts were originally set forth in Revenue Ruling 81-100 (hence the alternative name), which has been superseded by Revenue Rulings 2011-1 and 2014-24.

Highly compensated employee (a/k/a HCE): An employee in whose favor discrimination is prohibited by section 401(a)(4) or 410(b) of the Internal Revenue Code. There are no bars to discrimination with the HCE group. An HCE is an employee whose compensation during the preceding plan year exceeded an indexed dollar threshold ($135,000 for nondiscrimination tests performed in 2023 that look back to 2022 compensation; $150,000 for 2024 tests that look back to 2023). A plan may optionally provide that only employees who pay exceeds the threshold and are in the highest paid 20 percent of the employer's work force will be classified as HCE's.

 

HR-10 plan (a/k/a Keogh plan): A qualified plan whose participants include self-employed individuals. See "employee".

 

Hybrid plan: A generic term for cash balance plans, pension equity plans and some plans with variable annuity benefit formulas. Although they differ in their economic effects, these plans have in common a set of special rules governing such matters as nondiscrimination testing, vesting, transitions from "traditional" to hybrid plans and plan terminations. It should be noted, though, that almost all existing guidance deals only with cash balance plans, as the other types of hybrid are fairly rare.

 

Indirect rollover: A rollover of a distribution that an individual receives from a plan or IRA and then deposits into an eligible retirement plan. A rollover generally must be carried out within 60 days after receipt of the distribution, although the deadline for some types of distribution and the IRS allows late rollovers in cases of hardship.

Individual retirement account (a/k/a IRA): An investment account whose earnings are exempt from current taxation. IRA's are owned by individual taxpayers, who may make contributions to them. In a "traditional" IRA, contributions are deductible (subject to conditions and limitations), and distributions are taxed as ordinary income. (See "Roth IRA" for the alternative tax treatment.) IRA's are usually unconnected with the owner's employer, but simplified employee pensions and SIMPLE IRA plans utilize them as funding vehicles, and some employers contribute directly to employees' IRA's. 

Individual retirement annuity (a/k/a IRA): An annuity contract that has the same tax characteristics as an individual retirement account and otherwise differs in only a few ways that are of little significance to most individuals. It is almost always safe to assume that any statement about an individual retirement account also applies to an individual retirement annuity. Note that they share a common acronym.

Individual retirement plan: The IRS's attempt to create a term that unambiguously refers to both kinds of IRA. It could be useful but has never become popular. Not even the IRS uses it consistently.

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Inherited IRA: An individual retirement account that an individual acquires either (i) after the death of the person who established the account or (ii) as the result of a direct rollover from a qualified plan or a 403(b) plan after the death of the plan participant. The surviving spouse of an IRA owner or plan participant usually has the option to convert an inherited IRA into the spouse's own IRA. Required minimum distributions from an inherited IRA are calculated separately from other IRA's, and distributions from them cannot be rolled over.

 

Investment in the contract: The tax cost basis of a taxpayer's interest in a qualified plan, 403(b) plan or IRA. Distributions attributable to investment in the contract are nontaxable, because they represent income that was previously taxed. As a broad generality (the details are more complicated), investment in the contract is recovered proportionately as benefits are distributed.

 

Master trust: A trust that holds assets of separate qualified plans established by the employer or other members of the same controlled group. (Contrast "group trust".) A master trust is purely an investment vehicle; it doesn't imply that the plans are combined financially or administratively in any way.
 
Money purchase pension plan (a/k/a money purchase plan): A now largely obsolete species of defined contribution plan. The plan must specify the contribution (as a percentage of compensation or, less often, a dollar amount) that will be made to each participant's account each year, and the plan is subject to many of the same rules as defined benefit plans. At one time, money purchase pension plans had higher employer deduction limitations than profit sharing plans, but that advantage no longer exists, leaving only a handful of circumstances in which there is any reason for a money purchase plan. They are often adopted by contractors on projects subject to the Davis-Bacon Act or similar state laws, because employer contributions can be counted toward meeting prevailing wage requirements.

Multiemployer plan (a/k/a Taft-Hartley plan): A qualified plan that (i) provides benefits to employees of two or more employers that are not part of the same controlled group and (ii) was established through collective bargaining. Many special rules apply to multiemployer plans, most notably withdrawal liability.

Multiple employer plan: A qualified plan covering employees of two or more different controlled groups that was not established through collective bargaining. Historically, multiple employer plans were mostly maintained by trade associations for their employer members or by professional employer organizations for their customers. Pooled employer plans are a recent innovation that is intended to make this type of plan more widely available to small companies.

Nondiscrimination test: A test that must be passed in order to demonstrate the plan coverage or benefits do not discriminate in favor of highly compensated employees.

 

Nonelective contribution: An employer contribution to a defined contribution plan that is not made in response to a participant's election to defer compensation, that is, that is neither an elective deferral nor a matching contribution.

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Normal retirement age: An age specified by a retirement plan, which may not be later than the later of the participant's 65th birthday or the fifth anniversary of his commencement of participation. Earlier normal retirement ages are permissible, but an age before 62 may not be "earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed". Normal retirement ages before 55 must receive IRS approval. Participants who are employed by the employer when they reach normal retirement age must be fully vested in their accrued benefits.

Normal retirement date: A date specified by a defined benefit plan as of which payment of the participant's benefit is presumed to commence. It is usually the first da of the month coincident with or next following a participant's attainment of normal retirement age and is significant only for its role in the plan's benefit formula. Benefits need not actually start at that time, nor are participants under any obligation to retire then. Benefits that commence before a participant's normal retirement date are almost always actuarially reduced, while benefits that commence later may be actuarially increased. Benefit accrual may not be cut off at the normal retirement date, but participants do not have a right to both continued benefit accrual and actuarial increases. Defined contribution plans also specify normal retirement ages and dates, but those are not of great importance, since a participant's accrued benefit simply equals his account balance.

Pension Benefit Guaranty Corporation (a/k/a PBGC): A government corporation established "within the Department of Labor" that insures benefit promised by defined benefit pension plans other than governmental and church plans that are exempt from ERISA. Coverage is mandatory for plans that fall within the PBGC's mandate. Single employer plans and multiemployer plans are covered by separate insurance programs.

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• The single employer plan program provides benefits to participants in covered plans that terminate without sufficient assets to satisfy all of their benefit liabilities. The PBGC doesn't guarantee benefits in excess of a maximum that depends on the year in which the plan terminates, the participant's age when benefits commence and the form in which benefits are paid, and other limitations exist. Covered plans pay premiums to the PBGC: an indexed "flat rate" premium ($96 per participant for plan years beginning in 2023) and a "variable rate" premium equal to 5.2 percent of the plan's vested benefits in excess of the value of its assets; the variable rate premium is capped at an indexed maximum ($652 per participant in 2023).

• The multiemployer program provides financial assistance, in the form of loans, to multiemployer plans that are unable to meet their benefit obligations. Both benefit guarantees and premiums (currently $35 per participant with no variable rate premium) are much lower than for single employer plans. To a large extent, the multiemployer program has been rendered superfluous by the Emergency Pension Plan Relief Act of 2021, which grants financial assistance to insolvent multiemployer plans. These subventions are paid from the U.S. Treasury but administered by the PBGC. 

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The PBGC is also responsible for regulations and guidance concerning the withdrawal liability of employers that cease to have an obligation to contribute to multiemployer defined benefit plans.

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Pension equity plan: A defined benefit formula that defines a participant's accrued benefit as a multiple of his average compensation over some period before the date of the calculation. Pension equity plans are classified as hybrid plans. They are not very common.

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Pension-linked emergency savings account (a/k/a PLESA): A type of Roth account, designed as a short-term, non-retirement savings vehicle, that may be included in 401(k) plans, 403(b) plans and governmental eligible deferred compensation plans in plan years beginning after December 31, 2023.

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Pension plan: (1) ERISA: a generic term for any plan that provides deferred compensation.

(2) Internal Revenue Code: a defined benefit pension plan or money purchase pension plan.

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Pooled employer plan (a/k/a PEP): A multiple employer defined contribution plans that are open to any employer. The plan may be a qualified plan, a simplified employee pension plan or a SIMPLE IRA plan. Trustee and administrative duties must be in the hands of a "pooled plan provider" (typically a mutual fund family, bank, insurance company or other financial institution) registered with the Department of Labor. PEP's have been in operation only since 2021, following the enactment of legislation that allowed the established of multiple employer plans whose participating employers do not share a "commonality of interest".

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Profit sharing plan: A defined contribution plan that is identified as such by the plan document. This classification is meaningful only for qualified plans. Contrary to the impression conveyed by the label, a not-for-profit organization may maintain a profit sharing plan. The vast majority of 401(k) plans are profit sharing plans.
 
Prohibited transaction: A transaction that a plan is forbidden to engage in, regardless of its merits. ERISA and the Internal Revenue Code generally bar purchases, sales or loans between plans and closely related parties, the provision of services to plans by those parties and the use of plan assets for their benefit. The prohibitions extend to ERISA-covered plans, most qualified plans, and individual retirement plans.

Qualified automatic contribution arrangement (a/k/a QACA): An automatic contribution arrangement that affords a "safe harbor" from the ADP test (and likewise from the ACP test, if some additional conditions are met). Default elective deferrals and matching contributions must be at least equal to minimum levels set by statute. The default deferrals increase with increasing length of service.

Qualified cash or deferred arrangement: A cash or deferred arrangement that is included in a 401(k) plan, 403(b) plan, SARSEP or SIMPLE IRA plan and that satisfies various other requirements prescribed by the Internal Revenue Code.  Elective deferrals and Roth contributions under a qualified cash or deferred arrangement receive favorable tax treatment.
 
Qualified domestic relations order (a/k/a QDRO): A court order dividing plan benefits between spouses. QDRO's are an exception to ERISA's prohibition against the assignment or alienation of retirement plan benefits. A QDRO cannot take effect until it has been submitted to the plan administrator for review to ensure that it is doesn't conflict with the terms of the plan or with the restrictions that ERISA and the Internal Revenue Code place on QDRO's.

 

Qualified matching contributions (a/k/a QMAC's): Matching contributions that are included in a 401(k) plan's ADP test rather than its ACP test. This maneuver is possible if the plan passes the ACP test with "room to spare". The unneeded matching contributions can be recharacterized as QMAC's and utilized to improve the ADP test results. Recharacterization requires that they become fully vested and subjected to the same distribution restrictions as elective deferrals.

 

Qualified nonelective contributions (a/k/a QNEC's): Nonelective contributions that are included in a 401(k) or 403(b) plan's ADP test or ACP test. QNEC's must be fully vested and subject to the same distribution restrictions as elective deferrals.

Qualified plan: A retirement plan that satisfies the qualification requirements of section 401(a) or 403(a) of the Internal Revenue Code. Employers may establish qualified plans for their common law employees. A plan established by a partnership may include its partners; one established by a sole proprietor may include the business owner.

Required beginning date: The latest date at which distributions to a participant in a qualified plan, 403(b) plan or 457(b) plan or to the owner of an IRA may begin. That date is, is general, April 1st of the calendar year following the year of the later of (1) the participant's or IRA owner's attainment of an age specified by statute (70½ for individuals born before July 1, 1949, 72 for those born between July 1, 1949, and December 31, 1950, 73 for those born between January 1, 1951, and 75 for those born after December 31, 1958 (or maybe December 31, 1959; the statute has a drafting glitch). If a plan participant is actively employed by the employer that maintains the plan after the specified age, his required beginning date is April 1st of the calendar year following his year of retirement, unless he owns more than five percent of the employer. A defined contribution plan participant or IRA owner must receive a required minimum distribution for the calendar year in which he reaches the specified age (or retires, if that is later) (termed the "first distribution calendar year"), though it need not be distributed until April 1st of the following year.

Required minimum distribution (a/k/a RMD): The amount that must be distributed in any year to a participant or IRA owner after his required beginning date or to beneficiaries after his death. For defined benefit plans and annuities purchased by IRA's, the RMD rules govern the form in which an annuity may be paid. For defined contribution plans and IRA's that don't purchase annuities, each year's RMD is the amount determined under IRC §401(a)(9) and the extensive regulations issued under it. No minimum distributions are required during the lifetime of the owner of a Roth IRA. The same will be true for Roth accounts with respect to years  beginning after December 31, 2023.

 

Residual assets (a/k/a excess assets or surplus assets): Assets of a defined benefit pension plan that exceed the value of its benefit liabilities. Subject to various conditions, residual assets may revert to the employer when the plan terminates, but reversions are subject to severe excise taxes under IRC §4980.

Rollover (n.) or roll over (v.): The direct or indirect transfer of a distribution from a qualified plan, 403(b) plan, governmental eligible deferred compensation plan or IRA to any of the same types of plan. All IRA distributions can be rolled over; distributions from plans are eligible for rollover only if they are paid in a lump sum or as part of a distribution payable over less than ten years. In some circumstances, rollovers are allowed only to IRA's, and there are additional restrictions on rollovers of some types of contribution. A distribution that is rolled over is not taxable until it is distributed by the recipient plan. See also "Direct Rollover" and "Indirect Rollover".

Roth account: An account within a 401(k) plan, 403(b) plan or governmental 457(b) plan to which participants may make Roth contributions. Distributions from a Roth account are taxed in generally the same manner as distributions from a Roth IRA. To the extent that differences exist, Roth IRA's are treated more favorably, although the recent SECURE Act 2.0 removed the most significant difference: For years after 2023, Roth accounts, like Roth IRA's, will be exempt from required minimum distributions during the owner's lifetime.

Roth contribution: A contribution to a Roth IRA or Roth account. Except for the tax consequences, Roth contributions follow the same rules as elective deferrals.
 
Roth IRA: An IRA that reverses the "traditional IRA" tax treatment: Contributions are taxable when made, but distributions are entirely tax-free if they are received after age 59½ or following the IRA owner's death (or in some other circumstances) and at least five years after his first contribution to the IRA.
 
Section 409A: (IRC §409A) A set of restrictions on the form and timing of payment of unfunded deferred compensation, accompanied by severe tax penalties for violations.

SIMPLE IRA plan: A defined contribution plan that, while not subject to the Internal Revenue Code's plan qualification requirements has essentially the same tax advantages as a qualified plan. Participants may make elective deferrals, and the employer must either match their deferrals or make nonelective contributions. All contributions are deposited into "SIMPLE retirement accounts", which are individual retirement accounts with a couple of minor differences. There is almost no flexibility in plan design. In exchange, many requirements that apply to qualified plans are lessened or eliminated. This type of plan is available only to companies with no more than 100 employees and to individuals who wish to offer it to nonbusiness employees, such as domestic help.

 

SIMPLE Retirement Account: An IRA established to receive contributions under a SIMPLE IRA plan. The IRA may receive only (i) SIMPLE IRA plan contributions and (ii) rollovers and IRA-to-IRA transfers. During the first two years after a SIMPLE Retirement Account is established, the excise tax rate on distributions before age 59½ (IRC §72(t)) is 25 percent rather than the standard ten percent, and rollovers or transfers are allowed only to other SIMPLE Retirement Accounts. SECURE Act 2.0 makes it possible for Roth IRA's to serve as SIMPLE Retirement Accounts, although implementation of that provision will have to await IRS regulations. 

Simplified employee pension (a/k/a SEP): A defined contribution plan that, like a SIMPLE IRA plan, enjoys the tax advantages of a qualified plan without having to meet the same requirements. Plan design is more flexible, and contribution limitations are higher, than for SIMPLE IRA plans but fall far short of qualified plans. Originally, SEP's could include elective deferrals (an arrangement known as a "SARSEP"), but that option is no longer available except in plans that included it before 1997. Any employer may adopt a SEP.
 
Stock bonus plan: A defined contribution plan that, by default, distributes employer stock rather than cash. Employee stock ownership plans are a common form of stock bonus plan.

 

Surplus assets: See "residual assets".

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Suspense account: A defined contribution plan account that holds assets that have not yet been allocated to any individual participant's account. Suspense accounts are permitted only in employee stock ownership plans and a handful of other special cases. 

 

Tax-sheltered annuity plan (a/k/a (far more commonly) 403(b) plan): A type of retirement plan that has the same tax consequences as a qualified plan but is subject to somewhat different (generally simpler) requirements. Only public schools and organizations exempt from tax under IRC §501(c)(3) may establish 403(b) plans. Investments are limited to insurance company annuity contracts, mutual funds and group trusts. The distinctions between qualified plans and 403(b) plans are the product of historical circumstances and have eroded over the years.

Top-hat plan: An unfunded plan established primarily for the purpose of providing deferred compensation to a select group of management or highly paid employees. Top-hat plans are exempt from the substantive provisions of ERISA and have no reporting or disclosure requirements beyond one-time registration with the Department of Labor.

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Top-heavy plan: A qualified plan in which 60 percent or more of total accrued benefits inure to key employees (more than five percent owners, more than one percent owners whose annual compensation exceeds $150,000 (not indexed) and officers whose compensation exceeds an indexed amount: $215,000 in 2023 and $220,000 in 2024). Top-heavy plans are subject to minimum benefit requirements for non-key employees and to minimum vesting requirements.

 

Underfunded plan: A funded plan whose assets are insufficient to provide all of its benefit liabilities if they were to come due immediately. See "Funded" and "Unfunded".
 
Unfunded: See also "Funded". (1) Not secured by assets that have been placed beyond the reach of creditors or by a third party's guarantee. All qualified plans must be funded, and ERISA prohibits the establishment of unfunded deferred compensation plans other than top-hat plans. Funded, nonqualified deferred compensation plans are subject to highly unfavorable tax treatment.

 

(2) A benefit in a funded plan that the plan would not have sufficient assets to pay if the obligation were to come due immediately.

 

Universal availability rule: A requirement imposed on 403(b) plans. If a plan allows elective deferrals, it must make them available to all employees, with limited exceptions for part-time employees, student employees, employees who are eligible for elective deferrals under other plans within the same controlled group and nonresident aliens. In return, elective deferrals are exempt from ADP testing.

 

Variable annuity: A defined benefit plan formula that adjusts accrued benefits each year to reflect the plan's investment return. Some variable annuity formulas are classified as hybrid plans. These formulas are quite rare but have become more popular in recent years, especially among multiemployer plans, because required minimum contributions tend to be less volatile than under traditional defined benefit formulas.

Vested/Vesting: Entitlement to a right or benefit that is not subject to a substantial risk of forfeiture. Vesting most often requires the completion of a specified period of service. Plans that are exempt from the vesting standards of ERISA and the Internal Revenue Code may impose additional conditions, such as attainment of a specified age or refraining from competition for a period after termination of employment.

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Withdrawal liability: The share of the unfunded, vested benefits of a multiemployer defined benefit plan that an employer must pay to the plan when its obligation to contribute ceases or it no longer has operations that are covered by the plan. Regulations and other guidance concerning withdrawing liability fall within the domain of the Pension Benefit Guaranty Corporation.

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