Glossary

Defined Contribution Plan

A Defined Contribution plan is a retirement plan in which an employee contributes money and their employer can make a matching contribution.

401(k)

A 401(k) is an employer-sponsored retirement account. It allows an employee to contribute a percentage of their pre-tax salary to a retirement account.

Cash Balance Plan

Cash balance plans are like traditional defined-benefit pension plans with a 401(k) or profit sharing component.

Defined Benefit Plan

A Defined Benefit plan is a qualified employer-sponsored retirement plan that helps self-employed and small business owners save for retirement by allowing you to make very high contributions. 

Individual Retirement Account

An Individual Retirement Account (IRA) allows you to save money for retirement in a tax-advantaged way, There are several types of IRAs—traditional IRAsRoth IRAsSEP IRAs, and SIMPLE IRAs and each have different rules regarding eligibility, taxation, and withdrawals.

Qualified Retirement Plans

Qualified retirement plans are retirement plans that meet certain requirements, as established by Section 401(a) of the Internal Revenue Code. Qualified retirement plans are usually offered through an employer and allow for pre-tax contributions and tax-deferred growth.

 

Profit-sharing plan

A profit-sharing plan is a type of Defined Contribution plan that allows companies help their employees save for retirement. An employee receives a share of a company’s profits, either in cash or company stock. A Cash Balance plan is often used in combination with a 401(k) profit-sharing plan in order to maximize contributions and tax deductions.

Prohibited Transaction

Certain transactions are prohibited under the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA). Prohibited transactions are reported in the Form 5500 filing and trigger taxes and other penalties.

The IRC and ERISA contain outright prohibitions against direct or indirect economic transactions involving plan assets and parties related to the plan (referred to as disqualified persons or parties in interest) unless the transaction is covered by an exemption.

Prohibited transactions include, but are not limited to, the direct or indirect sale, exchange, or lease of property; extension of credit; provision of goods or services; transfer or use of plan assets and certain investments in employer securities or employer real estate in excess of the legal limits. In addition, plan fiduciaries are prohibited from receiving a kickback from any person in connection with a transaction involving plan assets.

The definitions for both party in interest and disqualified person are complex and include plan fiduciaries, service providers, sponsoring employers, as well as individuals who are related to the foregoing by family or business ties.

Please contact your tax or legal advisor if you have questions whether a particular transaction is prohibited and reportable on Form 5500 and 5330.

Plan Year

Refers to the 12 month period on which your plan is administered. This is usually the same as the fiscal year of your business.

Plan Sponsor/Employer

Refers to the business, partnership or proprietorship sponsoring the plan.

Pension Benefit Guaranty Corp (PBGC)

The PBGC is a governmental entity within the Department of Labor that guarantees the payment of certain benefits in the event a defined benefit plan terminates without sufficient assets to pay promised benefits. A PBGC covered plan is required to pay an annual premium but must meet certain distress requirements in order to receive benefits form the PBGC. Plans that are exempt from PBGC coverage and premium payments include 1) those that cover only substantial owners (more than 10% ownership) and their spouses, or 2) those sponsored by professional service employers with fewer than 25 active participants. Visit www.pbgc.gov for more information. Note that, in addition to other requirements, your Summary Plan Description must include special language if your plan is covered by the PBGC.

Non-Resident Alien

An employee who does not reside in the United States and who receives no earned income from sources within the United States is excluded from the required coverage testing for retirement plans. An employee who is a non-resident alien with earned income within the United States may be excluded from coverage testing if all of the employee’s earned income is exempt from U.S. income tax.

Leased Employee

An individual who performs services for another person (the Recipient) under an arrangement between the recipient and the third person (the Organization) who is otherwise treated as the individual’s employer. The leased employee is treated as the recipient’s employee if he or she has performed services for the recipient pursuant to an agreement with the leasing organization on a substantially full time basis for a period of at least 12 months and the individual’s services are performed under the primary direction or control of the recipient. Substantially full time basis for a year means 1,500 hours or 75% of the average number of hours worked by regular employees in similar positions. Substantially full time leased employees can impact the required coverage/nondiscrimination testing for the plan.

Solo 401(k)

A solo 401(k) is an individual 401(k) designed for a business owner with no employees. Businesses with a Defined Benefit plan may choose to set up a solo 401(k), to maximize contributions.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of tax-deferred employer-provided for small businesses with 100 or fewer employees.

IRS Penalties

Required contributions to a Defined Benefit plan must be deposited no later then 8 1/2 months after the plan year end to avoid IRS penalty.

Deductible contribution must be deposited no later than the due date for your company’s returns. This date can be extended if your company’s returns are extended.

Simplified Employee Pension IRA (SEP IRA)

A Simplified Employee Pension IRA (SEP IRA) is a traditional IRA for self-employed people and small-business owners. Contributions are tax deductible. Businesses who wish to contribute more than a SEP IRA allows may decide to open Defined Benefit or Cash Balance plan.

Employee

Refers to the employees and owners of the Plan Sponsor and to employees of any Controlled or Affiliated Service Group.

Fidelity Bond

A type of insurance coverage providing protection for acts of fraud or dishonesty by covered individuals obtained through your business insurance carrier. The Department of Labor requires that all qualified plans have a fidelity bond in an amount no less than 10% of trust assets and no more than $500,000. Plans that do have a fidelity bond are subject to audit. Plan only covering owners and their spouses are exempt from this requirement.

Third Party Administrator

A third party administrator (TPA) is a company that handles certain administrative responsibilities for other organizations. TPAs also manage many aspects of other employee benefit plans such as the processing of retirement plans and the day-to-day account operations and customer service needs. For instance, every year Dedicated Defined Benefit Services will calculate a contribution range for each plan, considering the investment performance of the given year.

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