Pension Plans – Glossary

A

ACP Test Safe Harbor Matching Contribution

These are matching contributions made to the eligible participants. The employer may choose to make these contributions at the time the elective deferrals are made or at any time as permitted by law and regulation. The amount of the contribution to the pension plan is matched with the employee 401(k) contribution up to certain limits as described in the plan document.

Actual Contribution Percentage

Is the average contribution percentage of the eligible employees in a group of highly compensated employees or non-highly Compensated employees.

Actual Deferral Percentage

Is the average of the ratios for all participants, where each ratio is calculated by dividing the amount of the deferral by the participant by that participant’s compensation. All such deferrals used in the calculation are subject to the statutory limits prescribed by the IRS each year and the compensation used is defined in the plan document.

Adopting Employer

The entity that assumes the obligations of the plan in order to provide benefits to its employees or to the sole proprietor.

ADP Test Safe Harbor Contributions

These are the contributions made by the sponsor under the Safe Harbor CODA provisions or QACA Provisions. There are three types of ADP Test Safe Harbor Contributions, the basic matching contribution, the enhanced matching contribution, and the safe harbor non elective contribution.

Alternate Payee

A spouse, former spouse, child, or any other dependent of a participant who is identified by a domestic relations order to receive all or a part of the benefits payable under the plan to the participant.

Automatic Contribution Arrangement (ACA)

Certain pension plans have a provision to enroll participants automatically as a contributing participant, mostly to the 401(k) deferral portion.
B

Basic Matching Contribution

The basic matching contribution is made under the safe harbor CODA provisions or QACA Provisions. This matching contribution is equal to (i) 100% of the amount of the employee deferrals less than 3% of the employee’s compensation (ii) 50% of the amount of the employee’s deferrals that exceed 3% but are less than 5%.

For example, an employee earns $100,000 and defers $5,000 in the 401(k) plan. The matching contribution will be $3,000 (100% of the first 3%) plus $1,000 (50% of the amount between $3,000 and $5,000) equaling $4,000.

Basic Plan Document

Is the pension plan document that outlines all the rules and regulations governing the pension plan.

Beneficiary

Is any individual or entity identified through the process of proper documentation to receive the proceeds of the pension plan upon the demise of the participant.

Break in Eligibility

Is a 12-consecutive month period that coincides with the period in which the eligibility for participation is being determined in which the employee works lesser than 500 hours (or lesser if mentioned in the adoption agreement).

Break in Vesting Service

Is a plan year in which the employee fails to complete more than 500 hours of service (or lesser if mentioned in the adoption agreement). This year or period will not be counted towards vesting calculations for the pension plan calculation purposes.
C

Catch-Up Contributions

These are contributions made in excess of the applicable plan limits or IRS limits if the participant is above the age of 50.

Compensation

The compensation that will be used to determine benefits has to be defined in the plan document. For the purposes of a pension plan, compensation could mean any of the following:

  • W-2 Compensation
  • 3401(a) wages, etc

Contributing participant

A contributing participant is a participant who has enrolled in the pension plan and on whose behalf the employer is contributing to the plan.

Contributing percentage

It is the ratio of the contribution by the participant to the participant’s compensation or the ratio of the contribution by the employer for the participant to the participant’s compensation.

Custodian

Is an entity appointed in the adoption agreement or the trust agreement to hold the assets of the trust.
D

Deemed IRA

Is a traditional IRA or Roth IRA established in the plan

Designated Beneficiary

Is the individual who has been designated as the beneficiary by the participant.

Determination Date

For the first plan year, the determination date is the last date of the plan year. For all other years, the determination date is the last day of the previous plan year.

Direct Rollover

Is a transfer of the participant’s benefits after retirement or termination of employment to an IRA or the plan of the new employer.
E

Early Retirement Age

Is the earliest date defined in the plan document where the participant could elect to receive retirement benefits.

Earned Income

Earned Income is that part of the earnings on which the owner pays FICA taxes. Per IRS regulations , only the earned income can be used for calculating pension plan contributions.

Effective Date

Is the date the plan or the amendment becomes effective as indicated in the Adoption Agreement. There are certain mandatory changes resulting from regulations like the Pension Protection ACT of 2006 which need to be incorporated in the plan. The effective date of such changes is after the effective date of the plan, and no later than the final deadline for incorporating such changes.

Elapsed Time Method

Elapsed Time method is a method of determining service so that the plan participant can receive benefits for a particular year.

Elective Deferrals

Are any contributions made either as a Pre-tax elective deferral or as a Roth Deferral to the plan at the election of the participant or after an automatic enrollment. These are contributions made by the employer in lieu of cash compensation after an agreement with the participant.

Eligibility Computation Period

Is the 12-consecutive month period after the employment commencement date of the employee. The subsequent eligibility computation period will be the plan year beginning during the initial eligibility computation period.

F

Fiduciary

A Fiduciary is a person who exercises authority or control with respect to the management of the pension plan. It could also be the investment advisor or any person who handles the administration of the plan.

Forfeiture

This is the part of the employer contributions that the participant is not entitled to receive.
H

Highly Compensated Employee

A Highly Compensated Employee (HCE) is any person who is (i) a 5% owner at any time during the year or the preceding year, or (ii) has compensation above $120,000 for 2015, 2016 or 2017. This limit is annually adjusted by the IRS based on the cost of living adjustments (COLA).

Hours of Service

This counts all hours for which an employee is entitled to receive compensation for performing service towards the employer. All hours granted by the employer as vacation days, sick days, etc will also count as a hours rendered towards the employer.
I

Indirect Rollover

When a participant in the pension plan terminates his service with the employer, the participant’s account balance can be rolled over to his/her own bank account. It is then the responsibility of the participant to transfer the amount to an IRA or a new pension plan so as to avoid additional taxes on the said amount. If the employee were to transfer such amount to the IRA or a pension plan, the rollover would be termed as an Indirect Rollover.

Alternatively, a Direct Rollover is when the account balance in a pension plan is transferred directly to an IRA or to a pension plan.
K
Key Employee
A key employee is any employee who during the preceding year was (i) a 5% owner of the business, (ii) was a 1% owner of the business having a compensation above $150,000, (iii) was a officer of the employer having received a compensation above $170,000.
L
Life Expectancy
Is the life expectancy for the purposes of pension plan as computed using the Single Life Table in Treasury Regulation section 1.401(a)(9)-9, Q&A 1.
M
Matching Contribution
Is an employer contribution made to a pension plan subject to the employee contributing on own behalf to the plan.
N
Normal Retirement Age
Is the age specified in the plan document. This is the age that is used for all assumptions and calculations.
P
Participant
Is any employee who has met the minimum requirement of entering the pension plan and will receive a benefit in the plan. It could also be an employee who has terminated employment but still holds benefits in the plan.
Q
Qualified Joint and Survivor Annuity
This will be an annuity for the life of the participant with a survivor annuity for the life of the spouse, which is not less than 50% and not more than 100% of the original amount.
Qualified Matching Contributions
These are matching contributions that are 100% vested and the amount is a match based on certain contributions made by the employee.
S

Safe Harbor CODA

Is a plan that has elected to make safe harbor contributions as per IRS requirements.
T
Top Heavy Plan
Is a plan where the benefits to the owners and the Highly Compensated Employees account for more than 60% of the total plan assets.
V
Valuation Date
Is the date specified in the plan document on which the valuation of the pension plan is performed. Performing a valuation means calculating all benefits for participants and other related items.
NOTE: These definitions are meant only for a general understanding of the terms and are in no way complete or exhaustive. These definitions are only our best interpretation of the complex definitions as defined in various laws, regulations, and publications of the IRS. Please refer to the IRS website as identified below

https://www.irs.gov/retirement-plans/plan-participant-employee/definitions