The following terms have been used throughout this chapter in connection with retirement plans.
Catch-up contributions Additional employee contributions that can be made only by those who attain age 50 by the end of the year.
Compensation The amount upon which contributions and benefits are calculated. Compensation for employees is taxable wages reported on Form W-2. Compensation for self-employed individuals is net profit from a sole proprietorship or net self-employment income reported to a partner or limited liability member on Schedule K-1.
Coverage Qualified plans must include a certain percentage of rank-and-file employees.
Db(k) Hybrid qualified retirement plans combining an employer-funded pension with a 401(k).
Defined benefit plans Pension plans in which benefits are fixed according to the employee’s compensation, years of participation in the plan, and age upon retirement. Contributions are actuarially determined to provide sufficient funds to cover promised pension amounts.
Defined contribution plans Retirement plans in which benefits are determined by annual contributions on behalf of each participant, the amount these contributions can earn, and the length of time the participant is in the plan.
Elective deferrals A portion of the employee’s salary that is contributed to a retirement plan on a pretax basis. Elective deferrals apply in the case of 401(k) plans, 403(b) annuities, SARSEPs (established before 1997), and SIMPLE ...