Pension Plan Glossary
The following definitions were taken from the Government Accounting Office's primer on pension plans and translated into English by AIPB.
Accrued Benefit. For defined benefit plans, the accrued benefit is the amount the participant will receive annually as a life annuity beginning at the plan's normal retirement age, as set by the plan benefit formula. For defined contribution plans, the accrued benefit is the balance of a participant's individual account, which includes the sum of that employee's contributions and/or the employer's contributions and investment retums (gains/losses, dividends, and capital gains/losses) from the contributions.
Annuity. A series of periodic benefit payments (annual or monthly) that begin at retirement and continue for a given time period or for the participant's lifetime. Annuities may continue through the spouse's lifetime.
Defined Benefit Plan. A type of qualified plan in which the plan sponsor provides a guaranteed benefit, generally described as a monthly benefit based on a formula that combines salary and years of service to the company. Defined benefit plans describe benefits as an annuity, but may offer those about to receive benefits the option of a lump-sum distribution.
Defined Contribution Plan. A type of qualified plan that establishes individual accounts for employees to which the employer, participants or both make periodic contributions. Benefits are based on these contributions as well as on the investment returns (gains and losses) for the individual accounts. Participants may be able to direct these investments.
Elective Deferrals. Voluntary contributions that defined contribution plan participants elect to have made to their individual accounts from pretax income. Participants do not include contributions as taxable income until they receive benefits.
Employee Retirement Income Security Act of 1974 (ERISA). This federal law sets minimum standards for private employer pension plans. The standards govern the management, operation and funding of plans and are enforced by the Department of Labor's Pension and Welfare Benefits Administration.
Employee Stock Ownership Plan (ESOP). A defined contribution plan feature that requires the sponsor to invest plan assets primarily in the employer's stock. Through an ESOP, the employer makes tax-favored contributions of company stock to individual participant accounts.
Employer Matching Contributions. Employer contributions made to defined contribution plan participants' accounts if the participant elects to make contributions. Matching contributions are generally based on a specified percentage of the employee's salary and the rate at which the participant contributes.
Hybrid Plan. Includes features of both defined benefit and defined contribution plans--e.g., provide benefits based on a formula such as a defined benefit plan, but describe benefits as an account balance as in a defined contribution plan. Cash-balance plans and floor-offset arrangements are hybrid plans.
Individual Account. Defined contribution plan participants have their own accounts to which they and/or the employer may make periodic contributions. Benefits are based on contributions and investment returns on the accounts.
Lump Sum Distribution. This is the distribution of a participant's entire interest in a qualified plan. Minimum Funding Requirements. Certain defined benefit and defined contribution plans subject to ERISA (see definition above) must satisfy requirements intended to ensure that plan assets are sufficient to pay benefits when due to participants.
Multiemployer Plan. This is a collectively bargained arrangement between a labor union and a group of employers in a particular trade or industry and jointly governed by them.
Plan Fiduciary. This is defined by ERISA as any person who exercises discretionary control or authority over the management ofa private pension plan and/or the plan's assets, has the authority to render advice regarding plan assets in return for compensation, and/or has discretionary authority or responsibility in the administration ofthe plan. The plan fiduciary must act prudently and exclusively in the interest of participants and beneficiaries.
Plan Termination. An employer may terminate its plan if it meets certain requirements. In certain instances, a plan may not have sufficien! assets to pay accrued benefits, and the Pension Benefit Guaranty Corporation may take over the plan.
Qualified Pension Plan. An employer pension plan that receives preferential tax treatment in exchange for satisfying IRC requirements, such as nondiscrimination in benefit and contribution limits and minimum coverage and benefits requirements.
Roll-over. This is a direct, tax-ITee transfer of pension benefits to another tax-qualified retirement plan or an IRA. Employers who sponsor qualified plans and enable departing participants to receive benefits as lump-sum amounts must give participants the option to have these amounts "rolled over."
Trust. A legal arrangement in which contributions to the pension plan are deposited with a trustee distinct from the plan sponsor.
Vesting. When a plan participant has earned a right to a benefit that cannot be taken away (i.e., a nonforfeitable right). Private plan sponsors must follow specific rules on how long participants must work in order to be fully vested in their accrued benefits. Participants are 100% vested in their own contributions to a qualified plan, but may have to work for a certain period before earning a right to their employer's contributions.