PensionQuote Glossary

Annual Plan Limits:

Each year the U.S. government adjusts the limits for qualified plans and Social Security to reflect cost-of-living adjustments and changes in the law. Many of these limits are based on the “plan year” as defined in the plan document. The elective deferral and catch-up limits are always based on the calendar year.

Cash Balance Plan: 

Defined benefit plan that simulates a defined contribution plan. Hypothetical individual accounts are maintained for each employee. Each year, the employee’s account is given a pay credit (usually a percent of compensation) along with an interest credit (either a fixed rate or variable rate linked to an index such as a Treasury bill rate). The benefit for a cash balance plan is the stated account balance that the participant is generally permitted to take as a lump sum upon retirement. Increases and decreases in the value of investments do not directly affect the benefit amounts promised to participants. Investment risks and rewards on plan assets are borne solely by the employer.

Defined Benefit (DB) Plan:

Employee retirement plan established and maintained by an employer that uses a predetermined formula to calculate the amount of an employee’s retirement benefit. Early DB plans (referred to as flat benefit plans) were commonly a set dollar amount that was the same for all employees, regardless of their actual compensation, or a fixed percentage of an employee’s compensation. Any employee who worked for the company a minimum number of years received the same dollar amount or fixed percentage upon retirement. Today, DB plans and their formulas are more likely to take into consideration an employee’s years of service; such plans are called unit benefit plans. Employer contributions to plans are determined actuarially. No individual accounts are maintained, as is done for defined contribution plans. In the United States, ERISA and the IRC consider any plan that is not an individual account plan a defined benefit pension plan.

Defined Contribution (DC) Plan:

As defined by the IRC and ERISA, a plan that provides an individual retirement account for each participant with benefits based solely on (1) the amount contributed to the participant’s account plus (2) any income, expenses, gains, losses, and forfeitures from other participants. Contributions to an account may be made by the employee or the employer. Defined contribution plans include 401(k), 403(b), and 457 plans.

Earned Income:

Under federal income tax laws, the money (usually salary and wages) an individual is paid for services performed as an employee or through self-employment. Earned income includes wages, salaries, tips, union strike benefits, long-term disability benefits received prior to minimum retirement age, and net earnings from self-employment. It does not include money received as interest, profit on the sale of property, or rent.

Pension Benefit Guarantee Corporation (PBGC):

A nonprofit corporation created by ERISA and charged with protecting the pensions of workers and retirees. Sponsors of defined benefit plans pay premiums to the PBGC, which help to guarantee benefits up to a specified maximum for participants and beneficiaries if a defined plan terminates. The PBGC administers the plan termination provisions of ERISA Title IV and the Multiemployer Pension Plan Amendments Act of 1980.

Pension Protection Act of 2006 (PPA) – most sweeping legislation since ERISA, the Pension Protection Act of 2006 includes significant changes for enhancing and protecting retirement savings. Key provisions of the legislation:

• Established new minimum funding standards for pension plans
• Set forth rules governing  the valuation of plan assets and liabilities; set forth special rules for at-risk plans, including certification and notice requirements
• Established additional requirements for annual reports to the Secretary of Labor
• Allowed the Secretary of the Treasury to waive minimum funding standards in the event of a temporary hardship or if the standard would be adverse to the interests of plan participants in the aggregate
• Required the Secretary of the Treasury to prescribe mortality tables to be used for determining any present value based on the actual experience of pension plans and projected trends in such experience
• Permanently extended the defined contribution provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001
• Created a new safe harbor for automatic enrollment of participants in 401(k) cash or deferred arrangements
• Made it easier for defined contribution sponsors to offer investment advice to plan participants
• Provided multiple exemptions to the prohibited transaction rules.

Plan Termination:

When a benefit plan ceases to exist and benefits are settled. Replacement with another plan is not a termination.

ERISA requires that all accrued benefits (to the extent funded) must be fully vested upon the termination or partial termination of the plan. If a plan has enough assets to meet all of its obligations, the employer may use what is called a standard termination to end the plan. In underfunded single employer pension plans, the Pension Benefit Guaranty Corporation (PBGC) guarantees participants’ benefits if the employer can no longer stay in business and fund its pensions.  If an employer chooses to end an underfunded plan, it is referred to as a distress termination. An involuntary termination occurs if the PBGC ends the single employer plan. When there is a distress or involuntary termination, the PBGC acts as trustee and uses its insurance funds to guarantee pension payments. Benefit payments are guaranteed up to a monthly limit that is set by law. A permanent payment amount is generally established on the date the plan is terminated. In the PBGC’s separate multiemployer program, pension plans normally are not terminated.  If a multiemployer plan becomes insolvent, it receives financial assistance from the PBGC to enable the plan to pay participants their guaranteed benefits.

Split Funding:

When applied to retirement plans, the use of two or more funding sources. For example, a portion of a plan may be funded by a life insurance company while the remainder is invested in stocks through a corporate trustee.

Underwriting:

A process used by a financial services provider (e.g., bank, insurance company, investment house) to assess the risk associated with providing a product (e.g., insurance, mortgage, credit). If the risk is acceptable, the underwriting process also includes determining what level of risk will be acceptable and the cost of the risk (e.g., insurance rate, interest rate).

Excerpted from Benefits and Compensation Glossary, 12th Edition, copyright 2010, International Foundation of Employee Benefit Plans, Brookfield, Wis. Copies of the book are available for purchase by calling 888-334-3327, option 4.