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I

immediate annuity

A contract with an insurance company under which payments begin as soon as the contract is purchased.

includible compensation

The basis for the Internal Revenue Code’s 457 maximum annual contribution calculation. The IRC defines includible compensation as gross compensation minus all pre-tax deductions, including deferred compensation. The 25% of “normal compensation” limit used by most 457 plans is mathematically equivalent to the IRC’s 33-1/3% of includible compensation limit, and is usually more easily understood. See “normal compensation.”

income fund

A portfolio that may contain stocks, bonds, or other investments that emphasize an income stream from dividends or interest. The value of an income fund grows primarily or entirely due to receipt and reinvestment of income. The Trust’s PLUS Fund is an example of an income fund.

index fund

A portfolio that seeks to replicate the investment characteristics of a broad-based index. The Trust’s 500 Stock Index is structured so that it performs as closely as possible to the performance of the S&P 500 Index.

indexing

(1) Linking an investment’s performance to a passively managed index or predetermined “basket” of securities.
(2) The linking of a payment to an economic indicator. For example, a pension payment may increase by the same percentage as the Consumer Price Index.

individual retirement arrangement (IRA)

A form of retirement investment administered by a bank or other custodian in the form of an individual retirement account, or by an insurance company in the form of an individual retirement annuity.

in-service withdrawal

401 Profit-Sharing Plan participants at least 59-1/2 years of age and fully vested may be allowed to withdraw some or all of the vested portion of their account while still employed, provided the employer has selected this plan option. Such withdrawals are limited to two per calendar year, may be rolled over, and are subject to 20% withholding. See “voluntary after-tax.”

intermediate term

For bonds, a maturity between 3 and 10 years.

Internal Revenue Code (IRC)

The laws established by Congress that defined how the federal government may tax residents and citizens of the U.S. Of particular interest to employers are sections 401 and 457 which outline requirements for qualified retirement and deferred compensation plans.

investment adviser

Any person who, for compensation, engages in the business of advising others, either directly or through writing, as to the value of securities or the advisability of investing in, purchasing, or selling securities, or who, for compensation, issues analyses or reports concerning securities. Most investment advisers must register with the SEC and with most states. They are subject to the Investment Advisers Act of 1940 and the rules and regulations thereunder, as well as applicable state “blue sky” laws.

investment allocation change

A change in the existing allocation which affects future contributions. An investment allocation change is not the same as fund transfer, which affects existing account balances.

investment contract

Contract between an investor and a financial entity, usually an insurance company, that promises to repay the principal plus a specific rate of return on the invested assets over the life of the contract. Also referred to as guaranteed investment contracts or GICs, these conservative investments are “guaranteed” only by the credit or the issuing financial institution. Although they resemble bonds in having fixed face value and paying a predetermined rate of interest, these contracts cannot be sold and therefore their value is not market-driven.

investment manager

Any fiduciary who manages, acquires, or disposes of assets. Under the Investment Advisers Act of 1940, this may be a registered investment adviser, a bank, or an insurance company licensed in more than one state to perform investment ma services.

IRA

Individual retirement arrangement. A form of retirement investment administered by a bank or other custodian in the form of an individual retirement account or by an insurance company in the form of an individual retirement annuity.

IRC

Internal Revenue Code. The laws established by Congress that defined how the federal government may tax residents and citizens of the U.S. Of particular interest to employers are sections 401 and 457.

IRS

Internal Revenue Service. A division of the Department of the Treasury that collects taxes authorized by the Internal Revenue Code, writes regulations and procedures under the code for enforcing and interpreting the code, and then enforces the code.

IRS minimum required distribution

The minimum payment required to be taken from a 401 or 457 account annually in order to satisfy the Internal Revenue Code. Starting in the year in which the participant reaches age 70 1\2 or retires, if later, the participant must withdraw at least the prior year’s ending balance divided by the joint life expectancy of the participant and designated beneficiary. See also “minimum required distribution.”

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J

joint and survivor annuity

A contract between a buyer and an insurance company providing periodic payments to the buyer for life and, after their death, periodic payments equal to 50% of the annuitant’s payment to a designated beneficiary for the balance of the beneficiary's life.

joint life annuity

A contract between a buyer and an insurance company providing periodic payments to the buyer for life and, after their death, to a designated beneficiary for the balance of the beneficiary’s life.

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K

“k” feature

A feature of 401 profit sharing plans that allows employees to defer income on a pre-tax basis. This “k” feature can be referred to by any of the following terms: cash or deferred arrangement (CODA), elective deferral, voluntary pre-tax contribution, salary reduction contribution, or 401(k) deferral. In the public sector, newly adopted plans cannot contain a “k” feature, but employers with a “k” feature plan in effect on May 6, 1986 may continue offering it to employees.

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L

latest beginning payment date

For 401 and 457 plan participants, benefit payments must begin by April 1 of the calendar year following the year in which age 70-1/2 is reached or the year of retirement, whichever is later. See “IRS minimum required distribution.”

life annuity

An annuity that provides payments for the life of the annuitant with no beneficiary payments. Payments stop at the death of the annuitant and the money reverts to the insurer. Typically this type of annuity pays the largest monthly benefit per dollar invested. Also called a “life-only” annuity.

loan (401)

The borrowing of vested 401 account funds by a participant and repayment of the funds via payroll deduction. The loan option must be elected by an employer in the plan adoption agreement.

loan account

On the issuance of a participant loan, a loan account is created in the amount of the outstanding loan balance at any given time. Loan repayments are transactions within the loan account.

loan default

Condition that exists when a participant does not make a required loan repayment for a period of 90 days.

loan disclosure statement

Document which states the terms and conditions of a loan, including the cost of the loan, interest rate, fees and repayment period.

loan guidelines

A set of terms and conditions under which loans may be made to participants. Should be designed to meet all Internal Revenue Code requirements.

loan issuance date

The date on which the loan begins accruing interest.

loan maintenance fee

For 401 plans, the amount deducted, if applicable to the employer’s plan, from the participant’s account balance to cover administrative costs of the loan for the preceding year.

loan origination fee

Amount deducted, if applicable to the employer’s plan, from the participant's account balance to cover the cost of processing the loan application and issuing the loan documents and disbursement.

loan promissory note

A loan document signed by a participant stating that a portion of their account assets are invested in a loan to the participant.

loan reamortization fee

Amount deducted, if applicable to the employer’s plan, from the participant’s account balance to cover the cost of processing the loan reamortization.

loan refinancing fee

Amount deducted, if applicable to the employer’s plan, from the participant account balance to cover the cost of processing the loan refinancing.

loan term

The life of the loan, which shall not exceed five years unless the loan is for the purpose of acquisition of a primary residence which may be up to 30 years.

loan truth in lending rescission notice

Loan document signed by a participant seeking a loan from their account if the participant does not agree to the terms of the loan and refuses to accept it.

long term

In general investing, an investment held for several years. In the bond market, a bond with a maturity of 10 years or more.

lump-sum distribution

Payment of the entire balance in a participant’s account within his/her taxable year. The distribution is generally only considered a lump-sum distribution if it is paid as a result of the death of the participant, as a result of the participant’s separation from service, or after the participant reaches age 59 and 1/2.

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M

mandatory 20 percent withholding

If a distribution from a section 401 qualified plan is an “eligible rollover distribution” and the participant does not make a direct rollover, 20 percent of the distribution must be withheld for federal income taxes. Participants cannot elect a lower rate of withholding, even if they intend to make a rollover within 60 days of the distribution.

mandatory contribution

Fixed contribution which is a requirement for plan participation.

maturity date

The day on which the principal or face value of a bond (or other debt security) is due to be paid back to the debt holder.

minimum coverage test

The IRS requirement that a qualified plan benefit a certain percentage of employees. It consists of several rules and tests detailed in IRC Section 410(b). Governmental plans are exempt from compliance with these rules.

minimum participation test

The IRS nondiscrimination requirement that a qualified plan must cover the lesser of 50 employees or 40 percent or more of all employees of the employer. (IRC Section (401)(a)(26)) Governmental plans are exempt from compliance with these rules.

minimum required distribution

The smallest periodic benefit payment the IRS will allow a participant of a 401 or 457 plan to receive. In determining this amount, the schedule of payments, amount of assets in the account and life expectancy of the participant (and beneficiary) are considered. See also “IRS minimum required distribution.”

money purchase plan

A defined contribution plan, other than a profit-sharing plan, that provides for an individual account for each participant and for fixed or determinable contributions by the employer. So called because the amount of the employee's retirement benefits will be determined by the value of the cashed-out investment purchased with contributions made on the employee’s behalf during employment. Employers must contribute a fixed amount annually to these plans.

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N

net asset value

The current worth of a share in a particular fund, calculated by totaling the market value of all securities owned by the fund, plus cash and other assets, subtracting any liabilities and dividing the result by the number of fund shares outstanding. Share prices increase or decrease based on activity in the underlying securities of the fund. Also called “NAV”, “share price” or “share value.”

nondiscrimination requirements

For the private sector, one of the requirements for 401 plan qualification: plans cannot discriminate in favor or highly compensated employees in terms of availability of benefits, rights and features. The regulations under section 401(a)(4) serve as the cornerstone of this requirement and provide guidance concerning the general nondiscrimination rules for qualified plans. These regulations, together with the regulations under sections 401(a)(5), 401(a)(17), 401(a)(26), 401(k), 401(l), 401(m), 401(b), and 414(r), constitute an integrated framework for applying the nondiscrimination provisions of the Internal Revenue Code. Government plans are excluded from compliance with these rules.

nonforfeitable benefit

A claim obtained by a pension plan participant or beneficiary to part of an immediate or deferred benefit that is unconditional and legally enforceable against the plan.

nonqualified plan

A plan not meeting the qualification requirements of IRC Section 401(a). For example, section 457 deferred compensation plans are nonqualified plans which are eligible for tax deferral under the Code.

normal compensation

For participants of 457 deferred compensation plans wishing to know their contribution maximum (25% of normal compensation), normal compensation is calculated as gross wages minus all pre-tax contributions, except for 457 deferred compensation. Pre-tax deferrals can include picked-up 401 employee contributions, 401(k) elective salary deferrals, Section 125 cafeteria plan deferrals, 403(b) tax-sheltered annuity elective deferrals, or other tax-advantaged employee deductions. See also “includable compensation.”

normal retirement age

401 Plans:
The earlier of the time a participant attains retirement as defined by the terms of the qualified plan, or the later of (a) the participant’s 65th birthday or (b) the 10th anniversary of becoming a plan participant. Participants automatically become 100 percent vested if they reach normal retirement age while employed by the employer.

457 Plans:
The later of (a) age 70 1/2 or (b) the year you actually separate from service.

notice, explanation and waiver of qualified joint and survivor annuity

Used by married 401 Money Purchase Plan participants and their spouses to waive, if desired, the RC Prototype requirement that their payment be in this special type of annuity.

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O

overpayment

Remittance sent which contains more than the amount identified to be credited to participant accounts.

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P

payment date

An employee’s selected date for the beginning of pension payments. If a participant does not select a date, default payment dates as specified in the 457 plan document will apply. 401 plans do not have a default payment date. However, payments must begin by age 70 1/2 or by retirement, if later.

pay stub calculation

An illustration of the amount an employee or participant may save in current income tax by contributing or increasing their contributions to a retirement plan based on their salary record.

penalty — 10% tax penalty on premature withdrawals

10% IRS penalty on most withdrawals of plan funds before a participant attains the age of 59-1/2.

penalty — 15% excise tax on excess distributions

15% IRS penalty for lump-sum withdrawals of more than $750,000 (indexed) or annual benefit payments from all retirement accounts totaling more than $150,000 (indexed).

penalty — 50 % excise tax for failure to take required minimum distribution

IRS penalty for failure to withdraw a minimum annual amount after age 70-1/2. Penalty is 50% of the difference between the minimum required distribution and the amount actually withdrawn. See “IRS minimum required distribution.”

pension plan

A plan providing retirement income to employees or deferring the income of employees to a period extending to the termination of employment or beyond. Such a plan requires benefits or employer contributions which are fixed and determinable. The section 401 money purchase plan is a form of pension plan.

pick-up provision or pre-tax mandatory

An employer-selected option in a 401(a) plan that allows mandatory employee contributions to be made on a pre-tax basis. Funds allotted under this provision are subject to Social Security tax. To qualify for pick-up, employee contributions must be mandatory. Once a participant chooses to participate in a plan with the pick-up provision, he or she may not subsequently cease participation in the plan or change the contribution amount.

plan administration fee

The charge assessed to each account compensating the plan administrator for supervising and completing the daily operation of the plan.

plan administrator

A person or corporation designated by the terms of the document under which the plan is operated or, if none is so designated, the plan sponsor.

plan conversion (401)

An employer currently provides a defined benefit plan and now wants to change to a defined contribution plan.

plan coordinator

Named in the Plan Adoption Resolution, individual authorized to administer the plan and take certain actions with respect to the plan.

plan date

A plan may be administered using either the calendar year or a designated 12-month period. This plan date is specified in the plan adoption agreement.

plan document

The legal description of the retirement plan an employer provides for its employees. This description includes who is eligible to join the plan, how and whose money is contributed to their accounts, withdrawal options and benefits.

plan qualification (401)

Determination by the IRS that an employer’s 401 plan meets all legal criteria. Employers need to obtain a letter of determination from the IRS stating that their plan complies with all tax code provisions.

plan sponsor

(a) The employer, in the case of an employee benefit plan maintained by a single employer; (b) the employee organization, in the case of a plan maintained by an employee organization; (c) the association, committee, joint board of trustees or other similar group of representatives of the parties involved, in the case of a plan maintained by one or more employers and one or more employee organizations. RC is the plan sponsor of the prototype money purchase and profit-sharing plans.

plan year

The calendar, policy, or fiscal year by which the plan records are kept.

portability

The ability of employees, upon termination of employment, to transfer their account balances from one employer to another without restriction or penalties.

portfolio

Combined holding of more than one stock, bond, commodity, real estate investment, cash equivalent, or other asset by an individual or institutional investor.

pre-tax mandatory

See “pick-up provision.”

primary residence

Dwelling in which a participant resides or intends to reside. For loan purposes, the determination of whether a dwelling is or will be used as a primary residence of the participant will be made at the time the loan is requested, based on the facts and circumstances of the particular situation.

principal

The amount of money invested or borrowed, as distinguished from interest or earnings. Principal is the base upon which interest and earnings are calculated. Contributions are an example of principal.

prior periods of service

The length of previous employment periods (in months) in which a rehired participant has provided service to the employer. This amount may include numerous rehire periods. The total amount of prior periods of service may be used to calculate current vesting percentage.

private letter ruling

A written response issued to a taxpayer by the National Office of the IRS that interprets and applies the tax laws to that taxpayer’s case. While private letter rulings may not be used as a precedent, they tend to predict IRS treatment of a similar case.

profit-sharing plan (401)

A plan established and maintained by an employer through which an employer may change the amount of the annual contribution each year. Employer contributions are not required on an annual basis, but must be substantial and recurring. Funds in a profit-sharing plan are tax-deferred until withdrawn.

prototype plan

A plan made available by a sponsoring organization for adoption by employers under which a separate funding formula is established by each adopting employer.

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Q

qualification

Requirements set out by the Internal Revenue Code and ERISA which if met, result in special tax benefits accorded to a pension or employee benefit plan.

qualified domestic relations order

A domestic relations order under IRC Section 414(p) that creates or recognizes an alternate payee’s right to all or a portion of a participant's qualified (401) plan benefits.

qualified joint and survivor annuity

An annuity for the life of a plan participant with a survivor annuity for the life of the surviving spouse which is not less than one-half of, nor greater than the amount of, the annuity payable during the joint lives of the participant and spouse. It is the actuarial equivalent of a single annuity for the life of the participant. See also “Waiver of Joint and Survivor Annuity.”

qualified plan

A plan that meets the formal qualification requirements of Code Section 401(a).

qualified preretirement survivor annuity

An annuity for the life of the participant and the participant’s spouse, the amount of which depends on whether the participant died before or after the earliest retirement age under the plan. If the participant dies after the earliest retirement age, the payments must be equal to the amount that a qualified joint and survivor annuity would have provided if the participant had retired the day before dying. If the participant dies on or before the earliest retirement age, the payments must equal the amount the survivor would have been paid under a qualified joint and survivor annuity if the participant had separated from service on the day of death, survived to the earliest possible retirement age, retired with an immediate qualified joint and survivor annuity on that date, and died the next day. Required for 401 money purchase plans. See also “annuity.”