Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

401(k) plan: an employment-based defined-contribution plan offered primarily by for-profit firms that allows employees to make tax-deferred contributions.

401(k)-type plan: an employment-based defined-contribution plan that allows employees to make tax-deferred contributions: for example, 403(b) plans and 457 plans.

403(b) plan: an employment-based defined-contribution plan offered by certain nonprofit organizations and public educational institutions that allows employees to make tax-deferred contributions to annuities or mutual funds.

457 plan: an employment-based defined-contribution plan offered primarily by state and local governments that allows employees to make tax-deferred contributions.

AGI (adjusted gross income): income that is subject to federal income tax after subtracting certain adjustments (such as individual retirement account and Keogh plan contributions) but before subtracting itemized deductions or personal exemptions.

Annuity: a method of distributing pension benefits (specifically, in equal portions over a retiree's life span).

Basis: the accumulated nondeductible contributions in a defined-contribution plan or a traditional individual retirement account.

Cash balance plan: an employment-based retirement plan that combines the portability of a defined-contribution plan with the security of a defined-benefit plan.

Defined-benefit plan: an employment-based retirement plan that promises retirees a certain benefit upon retirement, regardless of investment performance.

Defined-contribution plan: an employment-based retirement plan in which retirement benefits depend on investment performance.

EGTRRA: Economic Growth and Tax Relief Reconciliation Act of 2001.

ERISA: Employee Retirement Income Security Act of 1974.

ESOP (employee stock ownership plan): an employment-based retirement plan that is eligible for extra tax advantages and that encourages the distribution of the employer's stock to the employees' retirement accounts.

Federal Thrift Savings Plan: an employment-based defined-contribution plan offered by the federal government that allows employees to make tax-deferred contributions.

Highly compensated employee: generally, an employee who is either a 5 percent owner of the company or whose compensation is at least $90,000.

IRA (individual retirement account): a vehicle for tax-deferred retirement saving that is controlled by individuals, not employers.

Keogh plan: a vehicle for tax-deferred retirement saving available to self-employed people.

Lock-in effect: the practice of holding an asset longer than normal solely to avoid paying capital gains tax.

Lump-sum distribution: a method of distributing pension benefits (specifically, all at once).

Medium-sized or large establishment: a place of business, such as a store, factory, or office, in which 100 or more people work.

Money purchase plan: a defined-contribution plan with a fixed formula for making contributions that does not take into account profitability or employee participation.

Multiemployer plan: an employment-based retirement plan operated by a union or an association on behalf of its members, who work for participating employers.

Nondiscrimination rules: federally mandated rules to ensure that retirement benefits are extended to rank-and-file workers and not just to owners and top managers.

Penalty tax: a 10 percent tax that is levied on distributions received from retirement plans (other than annuities) and withdrawals made before age 59 ½ (except when certain conditions are met).

Pension Benefit Guaranty Corporation (PBGC): a nonprofit corporation, owned by the federal government, that insures defined-benefit plans against insolvency.

Pension: an employment-based retirement plan that is bound by a fixed formula for either benefits or contributions.

Portability: a feature of employment-based plans that allows employees to retain accrued retirement benefits when they switch employers.

Present value: the value in today's dollars of an amount of money to be received in the future.

Profit-sharing plan: an employment-based defined-contribution plan that may or may not be linked to profits and in which contributions are not determined by a fixed formula.

Qualified plan: an employment-based retirement plan that meets a variety of federally mandated rules and may therefore offer tax-deferred retirement benefits.

Rank-and-file workers: generally, employees who are neither 5 percent owners of a company nor receive compensation of $90,000 or more.

Roth IRA: an individual retirement account that accepts nondeductible contributions but allows tax-exempt withdrawals.

Saver's credit: a credit against tax, created by EGTRRA, that diminishes with income for contributions made to an IRA or a 401(k) plan.

SIMPLE (savings incentive match plan for employees): an employment-based defined-contribution plan available only to small businesses. SIMPLEs may offer limited tax-deferred retirement benefits with exemption from certain federal rules in exchange for meeting statutory mandates regarding vesting and employer contributions.

SEP (simplified employee pension): an employment-based defined-contribution plan available only to small businesses. SEPs allow an employer to contribute directly to an employee's individual retirement account without having to meet all of the conditions facing qualified plans.

Small establishment: a place of business, such as a store, factory, or office, in which fewer than 100 people work.

Stock bonus plan: an employment-based defined-contribution plan in which contributions are not determined by a fixed formula but from which beneficiaries may demand payment in the form of company stock.

Terminal wages: wages received in the year or years just before retiring.

Top-heavy plan: an employment-based retirement plan that benefits mostly owners and top managers but that can still offer tax-deferred retirement benefits by meeting stricter conditions than those that apply to other qualified plans.

Traditional IRA: an individual retirement account that accepts deductible contributions but makes taxable distributions.

Vesting: the accrual, either gradual or instantaneous, of rights to accumulated pension benefits.