EXAM #2 – Definitions (CH. 2, 7-10, 12) Flashcards
Employee Census
a matrix of information that is used in plant selection and identifies each employee, their age, their compensation, number of years of employment, and any ownership interest in the plan sponsor.
Third Party Administrator (TPA)
an organization, unrelated to the plant sponsor who has paid to administer the plan, sponsors, qualified, or other retirement.
Discretionary Contributions
allows an employer to decide each year whether to make a matching contribution and then informed the plan participants.
Prototype Plans
a pre-package plan that allows the sponsor to use a check the box approached to plan choices.
ERISA Attorney
an attorney who specializes in ERISA law.
Master Plans
provides a single trust or custodial account that is jointly used by all adopting employers.
Determination Letters
a request file with the IRS requesting a determination on a particular topic. In the case of a retirement plan, they are used when a plan is adopted, amended, or terminated to assure the plan sponsor at the qualified plan complies with applicable provisions.
Interested Parties
present employees, who are eligible to participate in the plan and present employees who are not eligible for the plan but who’s principal place of employment is the same as the principal place of employment of any employee who is eligible to participate.
Summary of Material Modifications
document that provides in plain language, the modifications made to a qualified plan.
Summary Annual Report
a summary of the annual financial report that the plan files with the department of labor each year.
Summary Plan Description
document that explains in plain language that details of a retirement plan and how it operates. It provides information on when an employee can begin to participate in the plan, health service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits
Qualified Trust
a trust, established or organized in the US that is maintained by the employer for exclusive benefit of employees.
Koegh Plan
a qualified plan for a self-employed individual.
Fiduciary
an individual that has a special relationship of trust, confidence and responsibility in certain financial obligations.
Department of Labor
governmental department charged with enforcing the rules, governing the contact of plan, managers, investment of plan, assets, reporting and disclosure of plan information, enforcement of the fiduciary, provisions of the law, and workers benefit rights is regulated by ERISA.
Tandem Plan
a 10% money purchase pension plan combine with a 15% profit sharing plan. These were popular prior to TRA 2000.
Distress Termination
termination that occurs when the employer is in financial difficulty and is unable to continue with a defined benefit plan.
Plan Freeze
employer will no longer make any contributions to the plan, but does not want to fully terminate the plan.
Annuity Method
determines how much a client needs to fund a retirement based on the assumption that the person will die exactly at the assumed life expectancy with a retirement account balance of zero.
Capital Needs Analysis
the process of calculating the amount of investment capital needed at retirement to maintain a pre-retirement lifestyle and mitigate the impact of inflation during the retirement years.
Capital Preservation Model
a capital needs analysis method that assumes that the clients life expectancy the client has exactly the same account balance as they did at the beginning of retirement.
Capitalization of Earnings Model
a capital needs analysis method based on producing a perpetual stream of income.
Monte Carlo Analysis
a mathematical tool used to calculate the success of an individual retirement portfolio using changing variables.
Purchasing Power Preservation Model
a capital needs analysis method I assume that at a client’s life expectancy, the client will have a balance with purchasing power equal to the purchasing power at the beginning of retirement.
Pure Annuity Concept
the basic capital needs analysis approach, which is generally prepared on a pretax basis.
Retirement Funding
the process of calculating the amount of investment capital needed at retirement to maintain the pre-retirement lifestyle and mitigate the impact of inflation during the retirement years
Retirement Life Expectancy (RLE)
the time period beginning at retirement and extending until death; the RLE is the period of retirement that must be funded.
Retirement Needs Analysis
process of determining how much money a person needs to accumulate to be financially independent during retirement
Remaining Work Life Expectancy (RWLE) – the work period that remains at a given point in time before retirement.
Sensitivity Analysis
a tool used to understand the range of outcomes for each variable in a retirement plan. It rotates each variable toward the undesirable side of the risk to determine the impact of a small change in that variable on an overall plan.
Suitability
having a reasonable basis to believe that a recommended transaction or investment strategy is appropriate for a client, after considering the client’s age, other investments, financial situation needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and other relevant issues.
U.S. Personal Savings Rate
the average saving amount in the U.S. calculated as personal savings as a percentage of disposable personal income.
Wage Replacement Ratio (WRR)
an estimate of the percent of income needed at retirement compared to earnings prior to retirement.
Work Life Expectancy (WLE)
the period of time a person is expected to be in the workforce – generally 30 to 40 years.
15-year Rule
a special catch-up provision for 403B plan participants that have worked for the plant sponsor for 15 years. The catch up allows them to defer up to an additional $15,000, however, no more than $3,000 per year.
Annuity Contracts
while the contracts are not specifically defined in the Internal Revenue Code, an annuity contract must be purchased for the employee from an insurance company and may give a fixed benefit or a variable benefit, depending on the performance of the investment. Any contract or certificate that is transferable to a person other than a trustee is not an annuity contract
457 Plans
a non-qualified deferred compensation plan for employees of state and local government and tax-exempt entities.
Form 5305-SIMPLE
the IRS form used to establish a SIMPLE IRA plan when the employer chooses the financial institution.
Electing Large Employers
employers with 26-100 employees sponsoring a SIMPLE plan where the employer elects to offer a 4% match on employee contributions to the SIMPLE plan or a 3% employer non-elective contribution for all eligible employees
“Final 3 Year” Catch-up
a special catch-up provision for public and private 457B plans that allows an individual to defer an additional $22,500 for 2023 to the plan in their final three years before the plan’s normal retirement ages.
Form 5304-SIMPLE
the IRS form used to establish a SIMPLE IRA plan when the employees choose the financial institution.
“Grace Period”
if an employer meets the 100-employee limitation in the given year, then the employer will have a two-year grace period when the employer can exceed the limitation without losing eligibility to maintain the SIMPLE.
Includible Contributions
an employee’s taxable, wages and benefits for the most recent year of service.
Nonelective Contributions
contributions to a qualified plan on behalf of all eligible employees
Qualified Joint and Survivor Annuity (QJSA)
the QJSA pays a benefit to the participant and spouse as long as either lives; although at the death of the first spouse, the annuity may be reduced.
Savings Incentive Match Plans for Employees (SIMPLEs)
retirement plans for small employers with 100 or fewer employees who earned at least $5000 in a year. SIMPLE may be established as SIMPLE 401(k) or SIMPLE IRA.
Section 501(c)(3) Organizations
nonprofit tax-exempt organizations are established under IRC 501(c)(3) of the IRC.
SIMPLE IRA
a SIMPLE plan that utilizes an IRA account as the funding vehicle of the plan
SIMPLE 401(k)
a SIMPLE plan that utilizes a 401(k) account as the funding vehicle of the plan
Tax-sheltered (Deferred Annuities or 403(b) Plans)
retirement plans for certain qualified, nonprofit organizations or employees of public educational systems off, often called 401(k) for nonprofit organizations.
Bargain Element
appreciation of employer stock above the exercise price.
Constructive Receipt
in income tax concept that establishes when income is included by a taxpayer, and therefore subject to income tax. Income is constructively received in the taxable year during which it is credited to the employees account, set apart from the employee, or otherwise made available so that the employee may draw upon it at any time or so that the employee could have drawn upon it during the taxable year if notice of intention to withdraw had been given.
Deferred Compensation Arrangements
an arrangement to pay an executive compensation in a future year.
Economic Benefit Doctrine
an employee will be taxed on funds or property set aside for the employee if the funds were property or unrestricted and nonforfeitable, even if the employee was not given a choice to receive the income currently.
Employee Stock Purchase Plan (ESPP)
a plan designed to benefit all or a large portion of an employers employee that gives employees incentive to buy employer stock by allowing the employees to purchase a stock at a discounted price (up to a 15% discount) and receive favorable tax treatment for any games if the stock meet certain holding period requirements.
Eligible Corporation
under Section 83, companies that are not publicly traded in that have a written plan under which at least 80% of employees are granted stock options or RSUs to receive qualified stock.
Excess-benefit Plans
a type of SERP that is designed solely to provide benefits in excess of the benefit benefits, available and qualified plans based on the limits under IRC 415.
Incentive Stock Option – a right given to an employee to purchase an employers common stock at a stated exercise Price. If the requirements of IRC 422 Armat, the employee will not recognize any taxable income at the date of the grant. Further, at the date of exercise, the employee will also not be subject to ordinary income tax on the difference between the fair market value of the stock and the exercise price. This difference is a positive adjustment for the alternative minimum tax calculation. When the employee sells the stock subsequent to the exercise, the difference between the sale price of the stock and the original exercise price is considered a long-term capital gain, and there’s a negative attachment for the alternative minimum tax calculation.
a right given to an employee to purchase an employers common stock at a stated exercise Price. If the requirements of IRC 422 aren’t met, the employee will not recognize any taxable income at the date of the grant. Further, at the date of exercise, the employee will also not be subject to ordinary income tax on the difference between the fair market value of the stock and the exercise price. This difference is a positive adjustment for the alternative minimum tax calculation. When the employee sells the stock subsequent to the exercise, the difference between the sale price of the stock and the original exercise price is considered a long-term capital gain, and there’s a negative attachment for the alternative minimum tax calculation.
IRC Section 83(b)
election including gross income, the difference between the fair market value of restricted stock and its purchase price.
Nonqualified Deferred Compensation Plan (NQDC)
a contractual arrangement between the employer and an executive whereby the employer promises to pay the executive a predetermined amount of money sometime in the future.
Nonqualified Plans
plans that do not meet the requirements of the IRC 401(a) and therefore do not have the benefits of qualified plans
Phantom Stock Plan
a non-qualified deferred compensation arrangement where the employer gives fictional shares of stock to a key employee. They are initially valued at the time of the Grant. The stock is valued at some terminal point in the executive unpaid in cash the differential value of the stock as compensation.
Qualified Employee
Under Section 83, an employee who is not excluded. An excluded employee is any employee (1) who is a one percent owner of the corporation at any time during the calendar year, or who was a one percent owner at any time during the 10 preceding calendar years; (2) who is, or has been at any prior time, the chief executive officer or chief financial officer of the corporation, or an individual acting in either capacity; (3) who is a family member of an individual described above (one percent owner, CEO, or CFO); or (4) who has been one of the four highest compensation officers of the corporation for the tax year or for any of the 10 proceeding tax years.
Qualified Stock
Under Section 83, stock in an eligible corporation that has received in connection with the exercise of an option or in the settlement of a RSU.
Rabbi Trusts
an irrevocable trust that is designed to hold funds and assets for the purpose of Payne benefits under a non-qualified, deferred compensation arrangement. The assets in a rabbi trust are for the sole purpose of providing benefits to employees and may not be accessed by the employer, but they may be seized and used for the purpose of paying general creditors in the event of a liquidation of the company. Assets within a rabbi trust or not currently taxable to the employee.
Restricted Stock Plan
an employer provided plan designed to increase retention and compensate employees with a non-cash outflow. The plan pays executives with shares of the employer stock. The executive does not pay any amount towards the allocation of the stock and, in fact, is restricted by the employer from selling or transferring the stock.
Secular Trusts
irrevocable trusts designed to hold funds and assets for the purpose of paying benefits under a non-qualified, deferred compensation arrangement. A secular trust does not create a substantial risk of forfeiture for the employee. Assets aside in a secular trust in immediate inclusion of income to the employee.
Stock Appreciation Rights (SARs)
rights that grant to the holder cash in an amount equal to the access of the fair market value of the stock over the exercise price.
Stock Option
a right to buy stock at a specified price for a specified period of time.
Substantial Risk of Forfeiture
an income tax concept that relates to when income is subject to income tax. A substantial risk of forfeiture exist when rights and property that are transferred or conditioned, directly or indirectly, upon the future performance (or refrain from performance) of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer, and the possibility of forfeiture is substantial if the condition is not satisfied.
Supplemental Executive Retirement Plans
non-qualified deferred compensation arrangements designed to provide additional benefits to an executive during retirement.
Title 1 of ERISA
coverage, participation, funding, and discrimination requirements of ERISA imposed on qualified plans.
Top-Hat Plans
plans designed to benefit a select group of top management or key employees.
Adjusted Basis (AB)
the portion of a distribution that is not subject to income tax. Usually, the return of after-tax contributions or non-deductible contributions.
Cash or Deferred Arrangements (CODA)
permits an employee to portion their salary on a pretax or Roth basis to a qualified plan or receive the salary as current taxable income. Generally, these are referred to as 401(k) plans.
Conduit IRAs
accounts that whole rollover funds are often referred to as IRA rollover accounts or conduit IRAs.
Direct Rollover
occurs when the plan trustee distributes the account balance directly to the trustee of the recipient account.
Early Withdrawal Penalty
a 10% penalty on distributions made before the participant attains the age of 59.5 (exceptions apply).
Fixed Amortization Method
the substantially equal periodic payment is calculated over the participant’s life expectancy if single, or the joint life expectancy if married, and the interest rate is within any prescribed range.
Indirect Rollover
a distribution to the participant with a subsequent transfer to another qualified account (or IRA).
Joint Life Expectancy Table
the life expectancy table used to determine a participant’s RMD when the participant’s designated beneficiary is the participant’s spouse and that spouse is more than 10 years younger than the participant.
Net Unrealized Appreciation (NUA)
a special taxation treatment for a lump-sum distribution from a qualified plan that treats the appreciation in the value of employer stock after the day of contribution to the plan until the date of distribution as capital gain.
Pre-1974 Capital Gain Treatment
a special taxation treatment for lump-sum distributions from qualified plans that treat the distribution attributable to pre-1974 participation in the plan as long-term gain.
Plan Loans
loans from a qualified plan made available to all participants on an effectively equal basis that are limited in amount (no greater than $50,000 or half of the vested account balance), are repaid within a certain time period (usually five years), bear, a responsible rate of interest, or adequately secured, and required the administrator to maintain a proper accounting.
Qualified Domestic Relations Order (QDRO)
a court order related to divorce, property settlement, or child support that can divide a participant’s interest in a qualified plan.
Qualified Joint and Survivor Annuity (QJSA)
the QJSA pays a benefit to the participant and spouse as long as either lives; although at the death of the first spouse, the annuity may be reduced.
Qualified Optional Survivor Annuity (QOSA)
an annuity for the life of a participant with a survivor annuity for the life of the participant’s spouse that is equal to specified applicable percentage of the amount of the annuity that is payable during the joint lives of the participant and the spouse (and that is actually equivalent to a single life annuity for the life of the participant).
Qualified Plan Loan Offset Amount
a plan loan offset amount treated as distributed from a qualified retirement plan, a section 403(b) plan or a governmental section 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee’s severance from employment.
Required Beginning Date (RBD)
the date on which lifetime minimum distributions must begin. Generally, April 1 of the year following the year the participant’s age 72, 73, or 75 (depending on year of birth).
Required Minimum Distribution (RMD)
a minimum amount that must be withdrawn from a qualified plan each year after the participant attains the age of 72 (for those who turn each 72 before January 1, 2023; age 73 for those attained age 72 after December 31, 2022 and each 73 before January 1, 2033; age 75 for those who attain each 74 after December 31, 2032). The amount is calculated using the uniform distribution table, the single life expectancy table, or the joint life expectancy tables.
Qualified Pre-retirement Survivor Annuity (QPSA)
provides a benefit to the surviving spouse if the participant dies before attaining normal retirement age.
Required Minimum Distribution Method
the substantially equal periodic payment is calculated in the same manner as required under minimum distribution rules. Note that payment or recalculate annually.
Separate Interest Approach
define the participant’s retirement benefit into two separate portions: one for the alternate payee and one for the participant.
Shared Payment Approach
split the actual benefit payments made between the participant and the alternate payee.
10-year Forward Averaging
a method of income tax calculation for certain lump sum distributions from qualified plans that divides the taxable portion of the lump sum distribution by 10 and applies a result to the 1986 individual income tax rates. The resulting calculation is then multiplied by 10 to determine the total income tax due on the distribution.
Uniform Lifetime Table
a table used to calculate the RMD for the plan participant unless the participant designated beneficiary is the participant’s spouse and that spouse is more than 10 years younger than the participant.
