• What is a Qualified Retirement Plan?
  A plan or program maintained by an employer which may allow deferral of salary income by an employee and/or provides a retirement income to an employee through employer contributions. This is usually given a special tax treatment under the Internal Revenue Code.

         

• What is a Qualified Defined Contribution Plan?
  A plan that provides an individual account for each participant and benefits based solely upon contributions to the account from any of several sources of employee "salary deferrals" or employer contributions, earnings and forfeiture contributions.
  Types include: Profit sharing, 401(k) Profit Sharing, Money Purchase Pension Plans, Age Weighted Plans, and Employee Stock Ownership Plans (ESOP).

• What is a Qualified Defined Benefit Plan?
  A plan, other than an individual account plan, that provides a participant a benefit in the form of an obligation on the part of the plan sponsor to pay a determinable amount at a set time to the participant. A formula is set forth in the plan is used to determine future benefits. Also referred to as a “pension plan”.

• What is a Profit Sharing Plan?
  A qualified defined contribution plan to which the employer agrees to make “substantial and recurring,” although generally discretionary, contributions. Amounts contributed to the plan are invested and accumulate tax free for eventual distribution to participants or beneficiaries at retirement, after a fixed number of years, or upon the occurrence of some specified event (e.g. disability, death, or termination of employment).

• What is a 401 (k) Profit Sharing Plan?
  A qualified profit sharing plan that offers participants an election to receive employer contributions in cash or to have these amounts contributed to the plan. A 401(k) plan may also contain a salary reduction agreement format. Under this type of arrangement, each eligible employee may elect to reduce current compensation, or elect to forgo a salary increase, and have the amounts contributed to the plan. [Treas Reg § 1.401(k)–1(a)(3)] Benefits attributable to employer contributions to a 401(k) plan generally may not be distributed without penalty until the employee retires, becomes disabled, dies, or reaches age 59 1⁄/ 2.

• What is a Participant Salary Deferral?
  Pre-tax contribution to a 401(k) plan made by the employer on behalf of the participant/employee under a salary reduction agreement. Contributions by salary deferral are nonforfeitable (100 percent vesting is required at all times).

• What are Employer Matching Contributions?
  Fixed or discretionary contributions made by an employer under a 401(k) plan. The contribution amount is determined by a formula and based upon a percentage of the salary deferral of the participant. Example: “100% match on first 3% contributed” means the employer will contribute dollar for dollar on the first three (3) percent of compensation contributed by the participant.

   

  

• What are Eligibility Requirements?
  The age and service requirements set forth in the plan by the employer, subject to Internal Revenue Code restrictions, that must be met before an employee becomes eligible to participate in a qualified plan. Example: Must be at least age 21 and complete one year of service.

• What are Allocation Conditions?
  The service and employment conditions set forth in the plan by the employer, subject to Internal Revenue Code restrictions, that must be met before a participant is entitled to receive an employer contribution (profit sharing, match, etc.) for a single Plan Year. Example: Must be employed on the last day of the Plan Year or, if terminated, must have worked at least 501 hours during Plan Year.

• What is a Forfeiture?
  The result of applying the vesting schedule of the plan to a participant’s account balance for purpose of determining the “vested account balance” for distribution. The amount which is not part of the vested account balance is “forfeitable” and will be either reallocated to continuing participants or used by the employer to offset employer contributions, depending on the employer’s election under the plan.

• Who is a Highly Compensated Employee (years after 1996)?
  An employee who performs services for the employer during the determination year (usually preceding year) and is a member of at least one specified employee group [Internal Revenue Code 414 (q)(i)]:

1.)  the employee is a more than 5% owner as defined in the Internal Revenue Code, at any time during the determination year;

OR

2.)  the employee receives compensation at any time during the plan year in excess of $90,000 (2002), and if elected by the employer, is a member of the top paid group of employees during the determination year.

• What is Nondiscrimination Testing?
  In a 401(k) plan, annual determination by a plan administrator performed to demonstrate that the operation of the plan did not disproportionately benefit the Highly Compensated Employees over the Non Highly Compensated Employees. The test generally consist of:

 

*These tests is usually performed during the completion of the annual informational Form 5500 return whichi is filed with the IRS at the end of a Plan Year.

• Who is a Key Employee (years after 2003)?
  An employee (including a deceased employee) who at any time during the determination period (preceding plan year) is:

               1) an includible officer having annual compensation in excess of $130,000 (2004) ; or
               2) a more than 5% owner, as defined in the Internal Revenue Code; or
               3) a 1% owner having annual compensation of more than $150,000 (2004). [Internal Revenue Code § 416 (i)(1)(A).]

• What is a Safe Harbor 401(k) Plan?
  A 401(k) plan under which the employer may avoid nondiscrimination and top heavy testing of contributions if the employer makes certain mandatory contribution requirements. A safe harbor 401(k) plan must provide for: 

     1) 100% immediate vesting of safe harbor employer contributions; and 

     2) Nondiscretionary safe harbor employee contributions. IRS Notice 98-52.