Tuesday, February 20, 2018
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The Glossary page helps you understand some of the terms that are common when talking about retirement plans.
401(k) Plan
A defined contribution plan that allows employees to contribute pre-tax dollars through salary deferral. Taxes on any income earned in the plan are deferred. Both contributions and accumulated earnings are fully taxable when withdrawals are made.
Accrued Benefit
Your Accrued Benefit as of a particular date is the benefit you have earned in the retirement plan as of that date, payable in monthly payments for your lifetime beginning when you reach the plan’s Normal Retirement Date.
Adjusted Gross Income
The income amount on which an individual computes deductions that are based on, or limited by, a percentage of income in order to compute federal taxable income. See Line 40 on IRS Form 1040. The system uses this as a more accurate measure of your available income than salary alone.
Administrator
This is the person or entity that is responsible for the administration of the ESOP according to the terms of the plan documents. The Employer usually serves as the Administrator, but often hires a Third Party Administrator to be responsible for the recordkeeping and other administrative functions for the ESOP.
After-Tax
An amount of income after taxes have been subtracted.
Age Pension Plan Income Begins
The age at which you begin to receive benefits from your pension plan or other defined benefit plan.
AGI
See Adjusted Gross Income.
Allocated and Unallocated Stock
Stock that is purchased by an ESOP with an exempt loan is held in a suspense account. Shares are released annually from the suspense account and allocated to the accounts of participants as the exempt loan is repaid.
Annual Growth of W2 Income
The expected annual growth rate of your income to be used in your projections. This growth rate will be applied to your (or your spouse's) income each year until your (or your spouse's) retirement age(s).
Annual Pension Income
The annual amount of income paid to a retired participant of a pension fund. Sometimes called defined benefit. The value is assumed to be in future dollars.
Annual Salary and Bonus
The annual salary and any pay bonuses received by an individual. This value is projected through retirement age and used for calculating annual retirement plan contribution amounts and pre-retirement salary.
Annual Savings
The annual amount saved for retirement. This amount may contain pre-tax and after-tax savings.
Asset
Anything having value that is owned by an individual, institution, or business.
Asset Allocation
The diversification of investments among categories of assets, such as short-term investments, stocks and bonds.
Asset Turnover
The percentage of a portfolio's asset value that is bought or sold annually. Turnover represents the number of times portfolio assets are replaced. The higher the percentage, the more the manager has traded.
Beneficiary
Your Beneficiary is the person you designate to receive benefits as may become payable under the terms of the plan after you die. If you are married, your spouse must be your designated Beneficiary unless your spouse consents in writing to a different Beneficiary.
Bond
A debt security. It is usually issued by government agencies, municipalities, and corporations. The purchaser actually lends the entity money and so is considered the creditor. The entity is the seller and is considered the debtor or issuer. The issuer agrees to repay the principal amount of the loan at a specified time (maturity). Interest bearing bonds pay interest periodically at a predetermined time. A discounted bond such as a Zero Coupon Bond pays no interest. It is sold at a discount from face value and the investor receives a rate of return through price appreciation and the bond is redeemed at face value.
Capital Gain
Any gain realized from the sale of an investment.
Cash Equivalents
Short-term securities, such as Treasury Bills, money market mutual funds, or short-term bank certificates of deposit that provide safety and liquidity but historically have only marginally outpaced inflation in terms of return.
Cash Flow
Contributions to and withdrawals from the Taxable Portfolio, which may occur between now and the participant's retirement age.
C-Corporation ESOP
A C-Corporation’s income is taxed at the corporate level. To the extent shareholders receive dividends from the C-Corporation, they must pay income tax on such dividends at a special dividend rate. One advantage of a C-Corporation ESOP is that shareholders who sell shares of the Company to the C-Corporation ESOP may take advantage of a tax deferral on the gain by using the special tax incentive provisions of Section 1042 of the Code.
Certain and Life Annuity
When paid as a Certain and Life Annuity, your retirement benefit is reduced and paid to you in monthly payments over your lifetime. If you die before the “certain” period is over, the Beneficiary you elected at the time of retirement will receive the remainder of your benefit payments until the “certain” period is over.
Code
The Internal Revenue Code of 1986, as amended. Qualified Retirement Plans are governed by the Code and ERISA.
Company Stock
An ESOP is legally required to invest “primarily” in the stock of the Employer (or a related company). The stock of the Employer that an ESOP can own is referred to as “Company Stock.” Thus, an ESOP is a shareholder of the Company since it owns some or all of the issued and outstanding shares of the Company.
Contribution
An amount of money that is deposited into a retirement account.
Contributions
The ESOP acquires assets to be used to provide a retirement benefit to its Participants by means of money or other property contributed by the Company and by earnings from that property. The amount the Company contributes to the ESOP for a given year is discretionary with the Company.
Control Premium
An amount or percentage by which the value of a controlling interest in a business exceeds its pro rata value of that business.
Correlation
A statistical measure representing the degree to which the movements of two assets are related.
Covered Compensation
Covered Compensation is an amount determined under Social Security laws. It is calculated by averaging the sum of the maximum Social Security taxable wage bases over a 35-year period. The averaging process assumes that you will continue to earn wages subject to Social Security taxes until you reach retirement age, which varies depending on your year of birth. The Social Security covered compensation table changes each year.
Credited Service
Credited Service is used in the calculation of your retirement benefit from the plan. It is the service component of the plan’s Accrued Benefit formula.
Current Value
The current market value of a particular investment.
Defer
To postpone an action to a later time. In terms of compensation, this means an amount is paid out at some point in the future, such as in retirement, rather than at the present time.
Defined Benefit Plan
A type of retirement plan in which the retired participant receives a specific amount based on salary and years of service. Defined Benefit plans are generally employer-funded and define the amount of retirement benefit to be paid at your Normal Retirement Date. Plan assets are held in a plan trust and no individual accounts are maintained.
Defined Contribution Plan
A company retirement plan in which the employee elects to defer a portion of his/her salary into the plan. 401(k) plans are a type of defined contribution plan.
Distributions
When an ESOP participant reaches normal retirement age, dies, or becomes disabled, the participant is entitled to receive a distribution of their ESOP account -- usually during the Plan Year following the year in which such retirement, death, or disability occurs. If a participant voluntarily quits, or is terminated prior to reaching any of these events, the participant may need to wait up to five (5) years in order to begin receiving a distribution of the vested portion of their ESOP account. Each ESOP is drafted differently, but generally, amounts invested in cash within the ESOP trust can be distributed quickly, while amounts attributable to Company Stock are often distributed in installments over a period of five (5) years.
Diversification
The process of investing your money in different kinds of investments rather than concentrating in limited investments. Diversification helps shield an investor from large losses because even if some securities perform poorly, others may perform well.
Diversification (ESOP)
Participants are eligible to partially diversify up to 50% of the Company Stock in their ESOP account after the participant has reached age 55 and performed 10 Years of Service.
Early Retirement Benefit
Early Retirement Benefit is a reduced benefit received prior to Normal Retirement Date on or after the plan’s Early Retirement Date. The benefit is reduced to account for the longer period of time it will be paid.
Early Retirement Date
Early Retirement Date is the date you may receive your Early Retirement Benefit, a reduced benefit, from the plan.
Efficient Frontier
A theoretical representation of all those portfolios offering the highest expected return for any given level of risk. More conservative portfolios offer lower risk but lower expected return; more aggressive portfolios offer higher expected returns but more risk.
Eligibility
These are the requirements before an employee can become a participant in a Qualified Retirement Plan. In an ESOP, it is customary to require that an employee be at least 21 years old and have performed one year of service before they become a participant.
Employee
Employee is any person employed by an Employer as defined by the plan. There may be exclusions for temporary, agency, leased, or other types of employees. Please refer to the Summary Plan Description or plan document.
Employer
Employer is the Corporation or any affiliated organization sponsored by the Corporation that has adopted the retirement plan. Please refer to the Summary Plan Description or plan document.
Employer
This is the corporation which creates and maintains the ESOP to provide a retirement benefit to its employees who qualify to become participants in the ESOP. Other companies which are related to the employer also may choose or be required to adopt the ESOP and have their employees who qualify become Participants. The employer also is referred to as the company.
Employer Contribution
A contribution to a participant's retirement plan by the participant's employer. In most cases the amount of the contribution is based on the employee's compensation.
Employer Match Amount - Level 1
For each dollar you contribute to your plan, your employer may contribute a matching amount. Typically, your employer will contribute from ten cents to one dollar for each dollar you contribute up to a maximum.
Employer Match Amount - Level 2
Employer matching contributions may be two-tiered. Your employer may match your contributions at one level up to a limit and match your contributions at a second level up to a second limit. For example, your employer contributes fifty cents for each dollar you contribute up to 4% of your salary and thereafter contributes twenty five cents for each dollar you contribute up to 6% of your salary.
Employer Match Limit - Level 1
Employer contributions are typically capped at some level - e.g., For each dollar you contribute to your plan, your employer contributes 50 cents up to a maximum of 5% of your salary.
Employer Match Limit - Level 2
Employer contributions are typically capped at some level. For two-tiered matches, this is the second maximum value.
Employer Matching Contributions
Many corporations offer to match employee contributions to retirement funds (including 401k plans). For instance, a company may offer a 50% match of a participant's contribution.
ERISA
This is the acronym for the Employee Retirement Income Security Act of 1974, as amended. ERISA protects employees’ retirement benefits and gives the Department of Labor and the Internal Revenue Service the power to oversee retirement plans adopted by Employers for benefit of their employees.
ESOP
This is the acronym for Employee Stock Ownership Plan. An ESOP is a Qualified Retirement Plan that is designed to invest primarily in stock of the employer. An ESOP is the only Qualified Retirement Plan that may borrow money.
Expected Annual Pension Income
See Annual Pension Income.
Fair Market Value
The price at which property would change hands between a willing buyer and willing seller, acting at arm’s length, in an open market where neither is under a compulsion to buy or sell, and when both have reasonable knowledge of the relevant facts. Under ERISA, it is critical that an ESOP may not purchase Company Stock for more than the Fair Market Value of the Company Stock on the date of a Stock Acquisition.
Final Average Earnings
Final Average Earnings is used in the calculation of your retirement benefit from the plan. It is an average of your earnings as defined by the plan and used to calculate your Accrued Benefit. Please refer to the Summary Plan Description or plan document.
Future Dollars
The value of a dollar at some specific time in the future. In general, the purchasing power of a dollar is decreased over time by inflation.
Hours of Service
You earn an Hour of Service for each hour you are paid, or entitled to be paid, by the Employer for the performance of duties.
Income Replacement Ratio
An Income Replacement Ratio is the percentage of your pre-retirement (working) income you need to maintain the same standard of living in retirement.
Income/Expense Amount
Anticipated future income or expense. Examples of income are trust or inheritance payments, proceeds from real estate sales, etc. Expenses could be college tuition payments, balloon payments, etc.
Income/Expense Description
Descriptive name of income or expense items provided by the participant.
Income/Expense End Year
The last year you expect to begin receiving the income. For one-time payments, start year equals end year.
Income/Expense Start Year
The first year you expect to begin receiving the income. For one-time payments, start year equals end year.
Inflation
When the price of goods and services rises, the result is called inflation. This means that things you buy today at one price are likely to cost more in the future; thus, inflation reduces the purchasing power of savings.
Investment Horizon
The number of years from today to a participant's retirement age.
Investment Option
A stock, bond, mutual fund or other investment in any of your portfolios. You must list them in the program in order to obtain accurate guidance.
IRA
Individual Retirement Account. Tax-advantaged personal retirement account, which allows a person to invest a limited amount of money each year. Depending on Adjusted Gross Income, marital status, and whether your employer offers a retirement plan at work, your contribution may be tax deductible.
Joint and Survivor Annuity
When paid as a Joint and Survivor Annuity, your retirement benefit is reduced and paid to you in monthly payments over your lifetime. When you die, a specified percentage of the benefit you were receiving will be paid to your Beneficiary. The percentage is based on the election you make at retirement.
Legacy at Death
The amount of assets that an individual would like to have remaining at the time of that individual's death. (The value of your estate.)
Leveraged ESOP
If an ESOP has borrowed money as an exempt loan to buy company stock, it is referred to as a Leveraged ESOP.
Life Expectancy
The estimated age at which an individual is statistically likely to die. This value is taken from a standard mortality table based on gender and year of birth.
Monte Carlo Simulation
An analytical technique in which a large number of simulations are run using random quantities for uncertain variables. The distribution of results is then analyzed to infer which values are most likely.
Mutual Fund
An investment company that combines money from shareholders and invests it in numerous securities, including stocks, bonds, and short-term money market instruments. As open-ended investments, most mutual funds continuously offer new shares to investors.
Non-qualified Retirement Plan
A retirement plan that does not meet the requirements stated in Internal Revenue Code Section 401(a). Such plans do not provide their participants with the tax benefits of qualified plans.
Normal Retirement Benefit
Your Normal Retirement Benefit is your unreduced benefit beginning at your Normal Retirement Date, in the normal form specified by your plan.
Normal Retirement Date
Normal Retirement Date is the date you may receive your unreduced Normal Retirement Benefit from the plan.
Other Tax-Deferred Accounts
The value of any other tax-deferred accounts that you would like to include in your projection analysis. Examples are other qualified plans like 403(b)'s (typically sponsored by charitable organizations), or 457's (typically sponsored by governments).
Participant
Employees who meet certain requirements established in the ESOP (the most common being the employee must be at least age 21 and have a year of service with the employer) are eligible to become a participant in the ESOP. Each participant has an account in the ESOP, which account is used to provide a benefit to the Participant after the participant’s employment with the employer terminates.
Pension Fund
A type of qualified retirement plan set up by a company, government, labor union, or other organization to provide specified benefits to its employees or members. Also see Defined Benefit Plan.
Person
When you specify investments to the program, you must specify them as belonging to you, your spouse, or joint assets (if applicable).
Portfolio
A collection of investments owned by an individual or organization
Pre-retirement Salary
Projected real salary in the year immediately preceding Retirement Age.
Pre-Tax
An amount of income before taxes have been subtracted.
Probability
The likelihood that a particular event or situation will occur.
Profit Sharing
An arrangement in which an employer shares its profits with its employees.
Profit Sharing Amount
In an arrangement in which an employer shares its profits with its employees, the amount allocated to your individual account.
Prohibited Transaction
The Code and ERISA prohibit the buying/selling of property, the extension of credit, furnishing of goods or services, transfer of any plan assets between a Qualified Retirement Plan and certain persons or entities involved with the Qualified Retirement Plan, such as any fiduciary, a person providing services to a Plan, the employer sponsoring the Qualified Retirement Plan, an owner (direct or indirect) of 50% or more of the Company’s Stock etc. The process by which an ESOP becomes a shareholder of a sponsoring Company technically is a Prohibited Transaction, but ERISA contains a specific exemption for that type of Prohibited Transaction.
Qualified Retirement Plan
A retirement plan that meets the requirements stated in the Internal Revenue Code Section 401(a). Such plans provide their participants with tax benefits over non-qualified plans.
Qualified Retirement Plan
A retirement plan that meets the requirements of Section 401(a) and other provisions of the Code. Qualified Retirement Plans provide special tax benefits to employers and Participants and, in the case of ESOPs, certain shareholders (see Section 1042 Deferral).
Repurchase Liability
This is the practical obligation of the company to covert company stock owned by the ESOP to cash in order to facilitate cash distributions to participants after their employment terminates.
Retirement
The time in an individual's life when the individual is no longer working or the beginning point of this time.
Retirement Age
The age at which an individual enters into retirement.
Retirement Income Goal
This is the annual income you expect to receive during retirement. Most financial advisors suggest that 70-80% of current salary levels is adequate for retirement.
Return
Represents the average annual change in value of an investment over time, including changes in share price (gain) and income (dividends and interest) expressed as a percentage.
Risk
The possibility that an investment will not perform as anticipated. An acceptable degree of risk must be determined by the individual with the understanding that the higher the expected return, the greater the risk factor. There are many different kinds of risk, such as exchange, inflation, interest rate, liquidity, political, et cetera. Most investors are considered to be risk adverse. That is, they seek security over risk.
Risk Level
The program uses a 1 to 100 scale of risk tolerance with 1 being the most conservative. You may use the Risk Advisor to help you assign your risk level or you may select your own risk level.
Risk Tolerance
An investor's ability or willingness to endure declines in the prices of investments while waiting for them to increase in value.
Salary/Wages
Money received by an employee on a regular basis from the individual's employer.
Savings Entry
As you specify your annual savings, you may specify an annual amount or a percentage of your current salary. Typical 401(k) contributions are in percentages of your salary while IRA contributions are in amounts, for example.
Savings Entry Method
When you specify your annual savings, you must select a method of contribution from the list. Percentage of salary, percentage of the allowable maximum for that year and annual amounts are available choices.
Savings Type
As you are specifying your investments, you must specify the portfolio in which each investment resides.
S-Corporation ESOP
An ESOP sponsored by an S-Corporation. Because S-Corporations are pass-through entities for income tax purposes, individual shareholders are liable for the payment of income taxes on the Company’s profits. For example, if two people each owned 50% of an S-Corporation, each year each shareholder would be personally responsible for paying income tax on 50% of the company’s profits. Ordinarily, S-Corporations make distributions to its shareholders to enable them to pay this tax. ESOPs are tax-exempt so, if an ESOP is the sole shareholder (100% owner) of a company, no income taxes will be due from the ESOP and no distributions need to be made to the ESOP. This allows a 100% ESOP-owned S-Corporation to have a financial advantage over its competitors.
Section 1042 Deferral
Section 1042 of the Code is a provision that provides an incentive for shareholders of a C-Corporation (an S-Corporation can become a C-Corporation by terminating its S-Corporation election) to sell their shares of the C-Corporation to the corporation’s ESOP (C-Corporation ESOP). If the requirements of Section 1042 are met, a shareholder may sell his or her shares of the C-Corporation to the C-Corporation ESOP and defer the payment of income taxes on the gain from that sale – usually forever. Section 1042 does not apply to the sale of shares to an S-Corporation ESOP.
Single Lifetime Annuity
When paid as a Single Lifetime Annuity, your retirement benefit is paid to you in monthly payments over your lifetime. When you die, your retirement benefits end. Benefit payments do not continue to anyone else.
Social Security Benefits
Social Security is a retirement plan set up by the United States government into which U.S. citizens and their employers pay throughout their working lives and from which they receive income in retirement. Social Security benefits are based on how long you worked, how much you earned, and your age at retirement. To get a precise estimate of your benefit, request your "Personal Earnings and Benefit Estimate Statement (form SSA 7004) from the Social Security Administration by telephone (1-800-772-1213) or visit the website at http://www.ssa.gov/mystatement/ to download the request form or submit a request online. The system will estimate your benefit if you desire.
Social Security Start Age
The age at which you expect to start receiving Social Security benefits. The earliest you can receive benefits is age 62.
Standard Deviation
Statistical measure of how much a return varies over an extended period of time. The more variable the returns, the larger the standard deviation.
Stock Acquisition
This is a transaction whereby an ESOP becomes a sole or partial shareholder of the company as a result of a purchase of company stock from one or more shareholders, a purchase of new shares from the company, or by a contribution of shares by the company.
Stocks
Ownership in a corporation, generally issued in the form of shares.
Summary Plan Description
This is the document a Qualified Retirement Plan is required to provide to each of its participants describing in general terms what that plan is and how the that plan works.
Suspense Account
An ESOP is the only Qualified Retirement Plan that is allowed to borrow money. If an ESOP borrows money to purchase company stock, the shares of company stock purchased with those borrowed funds are placed in a suspense account. The shares in the suspense account are allocated to the accounts of participants in future years as the loan that was used to purchase those shares is repaid by the ESOP.
Tax Deferred
An investment whereby taxes are not due on accumulated earnings until money is withdrawn. The IRS may impose penalties on withdrawals prior to certain time periods.
Tax Deferred Retirement Plan
A retirement plan that allows you to postpone current income taxes on pre-tax money invested or any earnings in an account until withdrawn. Such a plan may allow you to set aside part of your pay for retirement without immediate taxation. Tax-deferred accounts include traditional and rollover IRAs and 401(k) plans, 403(b) plans, and 457 plans among others.
Tax Free
An investment whereby all earnings are exempt from federal taxation and oftentimes by state and/or local authorities.
Taxable Portfolio
Any taxable investments you would like to include in your analysis. These include any stocks, bonds, mutual funds, savings accounts, or other taxable assets that you have accumulated outside of qualified retirement plans or IRAs.
Terminated Vested Retirement Benefit
If you terminate with enough Vesting Service to be 100% Vested but you have not yet reached your Early Retirement Date or Normal Retirement Date, you have a Terminated Vested Retirement Benefit. You are entitled to a deferred vested monthly retirement benefit at Normal Retirement Date or Early Retirement Date, if eligible.
Third Party Administrator
The administration of an ESOP requires that, from time to time, information and forms be obtained from participants and information and forms be provided to participants and that records be kept of each participant’s account. Administrators hire third parties who specialize in doing this type of administrative work and record keeping to carry out these functions for the ESOP and these third parties are referred to as Third Party Administrators.
Trustee
A trustee is the person or persons who have the responsibility of overseeing the ESOP’s trust, and managing the trust assets for the benefit of the Participants. Trustees must comply with the requirements of the Code and ERISA.
Valuation
ERISA requires that the value of an ESOP’s Company Stock ownership be valued at least annually. Since most ESOPs own stock that is not publicly traded, it is necessary for a qualified, independent appraiser to determine the Fair Market Value of the ESOP’s Company Stock ownership. The ESOP trustee is responsible for reviewing, analyzing, and approving the annual Valuation.
Vested
Vested means the portion of your Accrued Benefit that is non-forfeitable. When you have met the plan’s required amount of Vesting Service, you are 100% vested in your benefit from the plan.
Vesting
Vesting refers to the portion of a participant’s account that is non-forfeitable. Most plans have Vesting schedules that increase a participant’s vesting percentage little by little over the course of 6 years (graded schedule). Other plans use a cliff schedule that makes a participant 100% vested after three years of service. A participant’s account automatically becomes 100% vested if the Participant’s employment terminates due to retirement, disability, or death.
Vesting Service
Vesting Service determines your eligibility to receive retirement benefits. You must attain enough Vesting Service to be considered 100% vested in a benefit and eligible to receive the benefit.
Year of Service
This is a calculation that usually means a period of 12 months during which an employee or Participant performs at least 1,000 hours of service.
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