Lesson 16

Pension Benefit Guaranty Corporation (PBGC)

A federal organization that was created under ERISA to guarantee payments of pension benefits in defined benefit plans that terminate due to a lack of funding to cover benefit payments.

Defined Benefit Plan

A retirement plan that guarantees, and specifies in an employee's contract, the amount of benefits or percentage of employment income that a retiree will receive once pension benefits are payable.

Salary Reduction SEP Plan (SARSEP)

A simplified version of a 401(k) which incorporated a salary reduction approach in which employees elected to have a portion of their pay directed into the SEP's IRA fund. These are reserved for small business owners consisting of 25 or fewer employees and has been prohibited from being issued since 1996.

Employee Stock Ownership Plan (ESOP)

A type defined contribution plan that is invested primarily in employer stock in which qualified employees receive ownership upon retirement.

Qualified Plan

A type of retirement plan designed to provide certain tax benefits such as tax deductible contributions and tax-deferred earning growth to allow for greater earning on the investment.

Nonqualified Plan

A type of retirement plan that does not meet IRS guidelines to receive tax advantages. Contributions and benefits are taxable as ordinary income when contributed or received by the retiree and cannot be deducted when contributed by the employer. Nonqualified plans are restricted to top executives and key people within a company's leadership structurre.

Section 457 Deferred Compensation Plan

Allows employees of state and local governments, as well as employees of nonprofit organizations, the ability to defer compensation similar to 401(k) or 403(b).

Self-Employed Keogh (H.R.10) Plans

Also Known as H.R. 10 plans, established through the Self-Employed Individuals Retirement Act of 1962, Keogh Plans provide a retirement plan for self-employed and small business owners who do not qualify to create or participate in a qualified company pension plan.

Grade Vesting

Also referred to as graduated vesting, occurs over a number of years where a larger percentage of ownership is gradually transferred to the employee, who eventually gains ownership of 100% of the employer's contributions.

Immediate Vesting

An employee is immediately and fully vested in all employer contributions deposited into the employee's retirement account.

Traditional IRA

Any individual under ate 70.5 who has earned income can participate in an individual retirement account. Can contribute up to $5500 or up to $6500 if over the age of 50. Deposits into IRA's are made using pretaxed dollars. tax is paid on the benefits paid out.

(SIMPLE) IRA and 401(k)

Created by the Small Business Job Protection Act of 1996, Savings Incentive Match Plan for Employees', known as SIMPLE plans are marketed towards small businesses with fewer than 100 employees, as well as tax-exempt companies and government and are beneficial to smaller employers because they are less restrictive in establishing plans and lower administrative cost.

Simplified Employee Pension Plan (SEP)

Created to overcome the usual cost associated with establishing qualified plans. Essentially, sets up an IRA which an employer contributes funds on a tax deductible basis. As with a money-purchase plan, SEPs do not require employers to make annual contributions, but do require contributions to be made on a continual basis.

ERISA Applicability towards Pension Plans

ERISA protects employee retirement plans by establishing rules that qualified plans must follow in order to ensure that insurers and plan administrators do not misuse plan funds.

Defined Contribution Plan

Focus is on the contributions paid into the plan instead of the benefits distributed out of the fund. Both the employee and employer can deposit funds into the account. All contributions invested plus interest and possible dividends earned, will represent the total accumulation of funds available at the time of retirement.

Roth IRA

Like an IRA only contributions are made with post-taxed dollars. Benefits paid out will not be taxed.

Cliff Vesting

Occurs when an employer requires a certain number of years of plan accumulation and then provides 100% vesting to the employee.

Money-Purchase Pension Plan

Or Individual Account plan, requires the employer to deposit a fixed monetary contribution into the employee's pension fun instead of sharing in a company profits or issuing shares of the company's stock.

403(b) Plan

Or Tax-Sheltered Annuity (TSA) is a tax-favored retirement plan provided to eligible employees of the public schools system and certain non-profit organizations that are considered to be tax-exempt.

Profit Sharing and Stock Bonus Pension Plan

Provide retirees with shared profits from the company; however employers are not required to contribute to such plans every year. Risk of potential loss or gain depending on company's financial strength.

401(k) Plan

Retirement plan that allows an employee to take a reduction in salary instead, contribute this amount into 401(k) retirement fund. The contributed amount is not regarded as gross income, and any earning credited grow tax free until hey are withdrawn .

Thrift Savings Plan (TSP)

Retirement plans enacted by Congress to provide retirement pension for federal civil service employees and members of the armed forces.

Vesting Schedule

The time period in which an employer set up for employees to gain ownership over employer contributions that are deposited to the employee's qualified retirement account.

Years of Service

Years of employment required by the employee before he or she can gain ownership of employer retirement contributions.

Section 529 Plans

or Qualified Tuition Programs (QTPs) designed to save for college tuition as well as receive tax credits and deductions towards college expenses.