401(a) or 403(a) Plan
A qualified plan established under Section 401(a) or 403(a) of the Internal Revenue Code. A 401(a) plan may be established as either a defined contribution or a defined benefit plan. A 401(k) plan is a type of 401(a) plan that, unlike other types of 401(a) plans, permits employee elective deferrals. The main difference between a 401(a) and a 403(a) plan is that a 403(a) plan may only be funded with annuity contracts whereas other funding vehicles may be used in a 401(a) plan. If an employer’s plan is qualified, funds contributed to a supplementary Section 403(b) tax-deferred annuity plan generally do not reduce the Section 415 limits for the qualified plan and vice versa.
A type of qualified 401(a) defined contribution plan established by an employer enabling participating employees to make pretax contributions by salary deferral agreements structured within the format of a cash or deferral plan. A 401(k) plan may also accept matching employer contributions.
A defined contribution plan established by a public education organization (e.g., school, college, university or board of education), a 501(c)(3) nonprofit organization (e.g., a private school, research organization, hospital, charity, social welfare agency, a healthcare organization or a religious institution), an Indian tribe or qualifying religious ministers for their employees under IRC Section 403(b). Either or both employers and participants can make contributions to a 403(b) plan.
A contract issued by an insurance company that provides income for a specified period of time, such as a number of years, or for the life or life expectancy of an individual.
The person(s), institution, trustee, or estate properly designated to receive any available death benefits when the participant dies.
Person(s) or entity(ies) properly designated to receive benefits if the primary beneficiary becomes deceased before the participant.
Payment to a retirement plan before retirement income begins.
A retirement plan under which employee contributions are required in order to have employer contributions made to the plan. This is also known as a matching plan.
An annuity contract providing for the initiation of benefit payments at some designated future date or age. A deferred annuity is one still in the accumulating, or preretirement, stage.
Defined Benefit Plan
A retirement plan that specifies a formula for calculating the amount of income employees will receive in retirement. The formula is usually a percentage of final salary times years of service. Actuarial calculations set employer contributions to yield the benefit stipulated under the plan.
Defined Contribution Plan
A retirement plan that specifies a rate of employer and/or employee contributions. How much income a participant receives in retirement will depend on several factors, including amount and duration of contributions, investment earnings, and age at retirement.
A retirement plan provision requiring the completion of a specific period of service at the institution before benefits become nonforfeitable. Delayed vesting never applies to participant contributions; those contributions are always fully vested immediately. A plan may use either cliff vesting whereby a participant becomes 100% vested after completion of a specified period of service or graded vesting which provides that benefits become vested gradually over time. ERISA requires benefits in plans to be 100% vested within 3 years if cliff vesting is used or in minimum specified increments over a period of two to six years if a graded schedule is used.
An arrangement involving the payment of a retirement allowance before a participant has reached the requirements for “normal” retirement at the institution.
The Employee Retirement Income Security Act of 1974. A federal law that protects participants in most private retirement plans by providing extensive rights to plan participants and beneficiaries, and imposing stringent duties and standards on plan fiduciaries. ERISA also imposes reporting and disclosure requirements on plan sponsors. Public institutions and church plans are generally not subject to ERISA requirements. Many 403(b) plans are subject to ERISA requirements but exemptions are available to plans sponsored by certain types of employers:
- A governmental plan
- An exempt church plan*
- A TDA plan exempt from ERISA under DOL regulation 2510.3-2(f), that satisfies narrowly drawn criteria including:
- participation is completely voluntary,
- employer involvement is sufficiently limited to, among other matters, collecting and remitting payments as required by voluntary salary reduction agreements, and limiting funding choices available to employees to a number and selection designed to afford employees a reasonable choice,
- the annuity and custodial account representatives are permitted to publicize their products to employees,
- all rights under the contracts and custodial accounts are enforceable only by the participant, and
- the employer receives no direct or indirect consideration or compensation other than reasonable compensation to cover the expenses of administering the salary reduction agreements.
*A church must have made a valid election under IRC 410(d) in order for ERISA to apply to a church 403(b) plan.
ERISA provides that an administrator, and certain other individuals who perform services for an employee benefit plan, including a 403(b) plan, is a fiduciary with respect to that plan, if he or she:
- Exercises any discretionary authority or control with regard to management of the plan or with regard to management or disposition of plan assets;
- Provides paid investment advice with regard to allocation of plan assets; or
- Has discretionary authority or responsibility for administering the plan or is named as a fiduciary by the plan.
ERISA imposes a number of responsibilities on plan fiduciaries, including:
- Acting solely in the interest of plan participants and their beneficiaries for the exclusive purpose of providing them with plan benefits;
- Carrying out their duties prudently; and
- Administering the plan in accordance with the plan documents unless those documents are inconsistent with ERISA requirements.
In meeting these responsibilities, one of the key requirements is that plan fiduciaries be prudent in selecting and monitoring funding vehicles for plan assets.
Federal law requires plan administrators of employee benefit plans to file an Annual Return/Report, or Form 5500, for plans subject to the Employee Retirement Income Security Act of 1974 (ERISA).
Information Sharing Agreement
Under an information sharing agreement, a nonpayroll slot plan vendor and the plan sponsor agree to provide each other with various types of information from time to time, including information on the participant’s employment status, eligibility for hardship distributions, and satisfaction of plan loan limitations.
The minimum amount required by federal law to be paid by attainment of a certain age from most tax-favored retirement plans. To avoid a tax penalty, minimum distribution payments must generally begin by April 1 following the calendar year the participant becomes age 70½, or retires, whichever is later.
A company or trust that uses its capital to invest in the securities of other companies. There are two basic types of mutual funds, open-end and closed-end funds. Shares of closed-end funds are often listed on the New York Stock Exchange, and are traded like any other security. Capitalization of these funds remains fixed for the most part. Open-end funds issue their own shares to investors continuously, and stand ready to repurchase them as required. They are not listed on a national exchange. Within the group of open-end funds there are load and no-load funds. Load funds involve a charge to cover sales commissions and all of the cost of distribution. No-load funds don’t impose a charge and offer the shares at net asset value. Mutual funds may be used as funding vehicles in 403(b)(7) plans via custodial accounts.
A pension or benefit plan to which the employer makes all contributions.
Like qualified plans, most 403(b) plans are subject to nondiscrimination requirements which prohibit them from unduly discriminating in favor of highly paid employees over non-highly paid employees with respect to contributions and availability of other benefits, rights and features. Nondiscrimination testing is the blanket term for the tests that must be performed to ensure that plans are complying with the applicable nondiscrimination requirements.
Amounts remitted by the employer under the institution’s retirement plan. Contributions can include employer contributions and participant contributions via salary deferral or salary deduction.
Person(s) or entity(ies) properly designated to receive benefits upon the death of a participant.
A retirement plan established under Section 401(a) or 403(a) of the Internal Revenue Code (IRC). A 401(a) plan may be established as either a defined contribution or a defined benefit plan. A 401(k) plan is a type of 401(a) plan that, unlike other types of 401(a) plans, permits employee elective deferrals. The main difference between a 401(a) and a 403(a) plan is that a 403(a) plan may only be funded with annuity contracts whereas other funding vehicles may be used in a 401(a) plan. If an employer’s plan is qualified, funds contributed to a supplementary Section 403(b) tax-deferred annuity plan do not reduce the Section 415 limits for the qualified plan and vice versa.
A form of tax-free movement for the distribution of funds from one retirement plan into another (including IRAs) without necessarily triggering a taxable event. Ordinary 60-day rollovers whereby funds are distributed to the participant who then rolls them over to another retirement plan or an IRA are subject to mandatory 20% withholding and can lead to unexpected tax consequences. Direct rollovers whereby the retirement plan transfers funds directly to another retirement plan or an IRA at the instruction of the participant are not subject to mandatory 20% withholding.
Amounts contributed on a post-tax basis to a “Roth” form of retirement plan, or IRA.
Retirement plan contributions withheld from an individual’s salary which are subject to current income tax. Salary deduction contributions may take the form of ordinary after-tax contributions or Roth contributions. Amounts allocable to either type of after-tax contribution are federal tax-free when withdrawn but earnings on after-tax contributions are always taxable when withdrawn.
Retirement plan contributions withheld from an individual’s salary by the employer under the terms of a salary deferral agreement. Salary deferral contributions are not subject to current federal (and usually state and local) income taxes at the time of contribution. These contributions and earnings are taxable when withdrawn.
Salary Deferral Agreement
An agreement between an employer and an employee whereby the employee agrees to have a dollar amount or percentage of salary withheld from payment and the employer agrees to contribute such amount to a retirement plan on behalf of the employee.
Second Annuitant Annuity Partner
The person selected by the first annuitant for a two-life (joint-life) income option so that lifetime income will be paid to that person should the first annuitant die before the second annuitant.
Section 402(g) of the Internal Revenue Code specifies the maximum annual amount employees can contribute to a 403(b) or 401(k) plan through voluntary salary deferral contributions
Section 404(c) of ERISA provides that fiduciaries of defined contribution plans can be relieved of some of their potential fiduciary liability for losses arising from participants’ investment decisions to allocate amounts under the plan among specific investment options made available under the terms of the plan. In order for a fiduciary to be relieved of fiduciary liability, the plan must satisfy numerous requirements as set forth in ERISA Section 404(c).
This section of the Internal Revenue Code specifies the maximum annual contribution—employer plus employee (before-tax and after-tax)—that can be made to a retirement/ tax-deferred annuity plan.
Summary Of Material Modifications (SMM)
A Summary of Material Modifications is a summary of material changes made to a retirement plan. If a plan is materially modified, participants and beneficiaries must be informed, either through a revised summary plan description, or through a separate document, referred to as a Summary of Material Modifications (SMM).
Summary Plan Description
A Summary Plan Description is an understandable and detailed summary of the material provisions of a retirement plan. A Summary Plan Description, frequently referred to as an SPD, must be provided to plan participants and beneficiaries.
The amount payable at the annuitant's death.
Tax Deferred Annuity (TDA), Also Called Tax Sheltered Annuity (TSA)
A 403(b) arrangement or plan (separate from the retirement plan) pursuant to which an employee is permitted to make voluntary contributions on a pretax basis.
The participant’s non-forfeitable right to receive amounts allocable to contributions made to a retirement plan. (See also: DELAYED VESTING.)