Glossary of Terms

As one of the leading providers of employee benefit services in our community, we know our business well and are very familar with the ins and outs of employee benefit plans.  This expertise is a real plus - not only for us, but for the businesses we serve.

As in most business sectors, there are terms and phrases that are used every day by those working in the employee benefit field.  Realizing that this vocabulary may be somewhat foreign to you, we have developed this glossary as a resource for your benefit.  We hope you'll find it helpful.

administrator - The party responsible for undertaking all government reporting on behalf of a plan and making required disclosure to plan participants, performing all participant recordkeeping, and ensuring that the administration of the plan falls within the ERISA guidelines.

annual report - A report that contains plan information that must be provided yearly to the federal government.  See Form 5500 series.

beneficiary - A person other than a plan participant who receives benefits under an employee benefit plan.

benefits - Amounts payable to or on behalf of a retirement plan participant or beneficiary under the terms of the plan.  The term "benefits" also includes nonmonetary compensation such as employer-provided health, life, or disability insurance coverage, child-care facilities, etc.

cash or deferred arrangement - A tax-qualified plan under which a participant may elect to have employer contributions made to a profit-sharing or stock bonus plan or to take the contributions in cash.  See salary deferral plan.

common trust fund - An investment fund in which the assets of several plans are pooled for the purpose of providing a satisfactory diversification of investments and overall lower administrative expenses.

corporate fiduciary - Commonly, a bank or other institution that acts as a trustee or other fiduciary for a plan.  See fiduciary.

custodial account - An account in which securities are held by a custodian (e.g., a bank) for the benefit of a plan and its participants.

deferred compensation plan - An arrangement under which compensation earned currently is held by the employer (or set aside in a trust fund) to be paid to the employee at a later time (e.g., at retirement).

defined-benefit plan - A pension plan that provides a fixed retirement benefit.  With a defined-benefit plan, the employee's benefits are based on a definite benefit formula contained in the plan, and employer contributions are then geared to provide the sums necessary to pay the benefits promised by the plan.

defined-contribution plan - A plan that provides for an individual account for each participant and pays benefits based solely on the balance in the participant's account at the time of distribution.  See profit-sharing plan and stock bonus plan.

determination letter - A written statement issued by the IRS in response to a written inquiry as to whether or not a submitted plan meets the requirements for tax qualification.

eligible rollover distribution - A retirement plan distribution that qualifies for tax-free rollover to an IRA or another qualifiied plan.  Most non-annuity distributions are eligible.

Employee Retirement Income Security Act (ERISA) - A 1974 federal law that overhauled the provisions governing the establishment and operation of employee benefit plans.

employee stock ownership plan (ESOP) - A tax-qualified plan designed to invest primarily in the stock of the employer.

employer - Within the meaning of the pension law, a corporation, partnership, sole proprietorship, association, or any other organization that establishes a tax-qualified plan.

fiduciary - A party who, with respect to a plan, (1) exercises any discretionary authority or control regarding management of the plan and/or authority over the management or disposition of its assets, (2) provides investment advice for compensation with respect to plan assets, or (3) has any discretionary authority or responsibility in the administration of the plan.  The term also applies to any person designated by a named fiduciary to carry out fiduciary responsibilities.

Form 5500 series - The forms used by plan administrators to file the plan's annual report, as well as other information, with the federal government.  See annual report.

highly compensated employee - The tax law sets the criteria that determine highly compensated employees.  A tax-qualified plan may not discriminate in favor of these employees.

integration - Generally, the offset of employer contributions to a plan by the amount the employer contributes to Social Security, or the offset of benefits from a plan by the amount of projected benefits from Social Security.

Keogh plan - A tax-favored retirement plan established for the benefit of a self-employed individual (or individuals) and his or her employees.  Also known as an "H.R. 10 plan."

key employee - For purposes of the tax law's top-heavy rules, any plan participant who is (1) an officer of the employer earning more than $130,000 (to be adjusted for inflation after 2002), (2) a more-than-5% owner of the employer, or (3) a more-than-1% owner of the employer having annual compensation of more than $150,000.  See top-heavy plan.

lump-sum distribution - A payout of an employee's entire balance in a tax-qualified retirement plan because of the employee's death, disability, or separation from service, or when the employee reaches age 59 1/2.  A qualifying lump-sum distribution may be subject to favorable tax treatment.

money-purchase plan - A pension plan in which the participant's benefit is a function of the amount in the participant's plan account at distribution rather than a function of a fixed-benefit formula.  Unlike a profit-sharing plan, contributions are fixed by the plan.

multi-employer plan - A plan maintained pursuant to one or more collective bargaining agreements that covers the employees of more than one employer.

participant - Any current or former employee who is or may become eligible to receive a benefit from a plan covering such employees.

Pension Benefit Guaranty Corporation (PBGC) - The federal agency charged with administering the plan termination insurance provisions of ERISA.

plan sponsor - An employer or employee organization which sets up and maintains a plan.

plan year - The fiscal year of the plan.

profit-sharing plan - A plan maintained by an employer to provide for the participation in its profits by its employees.  The plan must provide a definite formula for allocating the plan contributions among the participants.

prohibited transaction - Transactions, such as certain loans, purchases, and sales, that are prohibited between a plan and an employer or various other parties that may have business associations with the employer.

prototype plan - A sample plan, usually approved by the IRS, that provides for separate trusts or custodial accounts for each employer that adopts the plan.

salary deferral plan - A tax-favored arrangement under which an employee elects to reduce his or her salary by a certain percentage, which is then placed into the employer's tax-qualified plan.  No federal income tax is immediately payable by the employee with respect to the salary deferral.  Also known as a "Section 401(k) plan."

savings incentive match plan for employees (SIMPLE) - A simplified retirement plan that may be set up by a self-employed person or a small business that employs no more than 100 employees and has no other retirement plan.  The plan can take the form of individual simple retirement accounts or a qualified salary reduction arrangement similar to a 401(k) plan.

stock bonus plan - A plan established by an employer to provide benefits similar to those of a profit-sharing plan, except that employer contributions are not necessarily dependent on profits and the benefits are distributable in the stock of the employer company.

tax-qualified plan - An employee benefit plan that satisfies the Revenue Code requirement for favorable tax treatment.

target-benefit plan - A retirement plan under which the employer selects the benefit to be provided to the employee without actually committing itself to providing that benefit.  Plan contributions are then made in an amount necessary to fund the "target" benefit.

top-heavy plan - A plan under which more than 60% of accumulated plan benefits are provided for "key employees".  Top-heavy plans are subject to several special requirements in order to be tax-qualified.  See key employee.

trustee - The institution that is named to hold, manage, and distribute the assets of an employee benefit plan.

vesting schedule - One of the schedules authorized by the tax law under which plan participants' benefits become nonforfeitable.  There are two minimum schedules: (1) 100% vesting after five years of service or (2) graduated vesting beginning after three years with 100% vesting after seven years. (Beginning in 2002, employer matching contributions must vest under a three year "cliff" or six year "graded" schedule.)


Familiarizing yourself with the language of employee benefits is an important step in the employee benefit planning process.  We hope that this has been helpful.  An even more important step in your benefit planning, however, is choosing a knowledgeable and experienced advisor who can assist your business in the selection, establishment, and implementation of a benefit plan for its employees.  We can help you in that respect, as well.

Our employee benefit personnel possess broad knowledge of the pension law's requirements regarding the establishment and operation of employee benefit plans.  They also have years of experience helping businesses like yours set up and administer their employee benefit programs.

We invite you to find out more about how we can help your business with its benefits planning.  Why not get together with us soon - at no obligation - to discuss your employee benefit program.