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Glossary of Terms

Listed below are definitions of commonly used benefit and wealth planning terms. We hope they assist in your understanding of our services and products. The source of this information is various trade publications and educational materials, this information is for educational purposes only.

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401(a) Plan - A qualified retirement plan held in trust for the benefit of the employees. 401(a) plans encompass profit sharing (e.g., 401(k)) and stock bonus arrangements.

401(k) Plan - A type of defined contribution profit sharing plan, which allows employees to set aside tax-deferred income for retirement purposes.

403(b) Plan - A qualified retirement plan similar to a 401(k) plan, which is offered by non-profit organizations, such as universities and some charitable organizations, rather than corporations.

409(A) Plan - Provides that unless specified requirements are met, all amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income, to the extent not subject to substantial risk of forfeiture and not previously included in gross income. Section 409A applies to amounts deferred on or after January 1,2005, subject to several special effective date rules.

412(i) Plan - A qualified retirement plan wherein older employees may contribute considerably higher amounts than allowed in traditional defined benefit plans. These plans are funded with insurance contracts, guaranteed by an insurance company. This benefit, risking no principal and providing guaranteed, secure returns, with maximum contributions and deductions are exactly what many business owners and professionals are looking for right now.

419(i) Plans - non qualified compensation arrangement wherein an employer provides selected employees a current benefit on a tax-deductible basis. The employer makes contributions to a multiple employer trust, which funds these benefits with permanent life insurance policies. While recent tax court cases have allowed the continued use of 419 plans, some practitioners feel that the risk of an unfavorable court ruling far outweighs the rewards the plans offer.

457 Plan - A non-qualified deferred compensation arrangement applying to government agencies, municipalities and other tax-exempt organizations. Such plans are subject to additional IRS limits and rules not associated with other non-qualified plans.

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Accumulated Benefit Obligation (ABO) - The value of pension benefits earned by an employee before a specified date; i.e., the actuarial present value of benefits.

Adjusted Gross Income (AGI) - An interim calculation in computing income tax liability. It is computed by subtracting allowable adjustments from gross income.

Administrator - In probate terms is a person that is appointed by the court to settle an estate when there is no will.

After-Tax Return - The return on an investment after the effect of taxes have been adjusted from the gross return.

Aggressive Growth Fund - A mutual fund whose primary investment objective is substantial capital gains, the more aggressive the investment the higher the risk.

Alternative Minimum Tax - An IRS mechanism to ensure that high-income individuals, corporations, trusts, and estates pay at a minimum amount of tax, regardless of deductions, credits or exemptions.

Annuity - Financial product or arrangement rendering a series of equal periodic payments (e.g., monthly or yearly).

Asset - Any item of economic value owned by an individual or corporation.

Asset Allocation - The process of dividing investments among different types of assets, such as cash, real estate, stocks, and bonds to optimize the risk/reward tradeoff based on an specific situation and goals. A key concept in financial planning and money management

Asset Class - Categories of similiar characteristic assets such as stocks, bonds, real estate or cash.

Audit - An examination and verification by an objective professional, such as a Certified Public Accountant, of a company's or individual's financial and accounting records along with supporting documents.
An IRS examination of an individual or corporation's tax return, to verify its accuracy.

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Balanced Mutual Fund - A mutual fund that buys a combination of common stocks, referred stock, bonds, and short-term bonds. This fund provides both income and capital appreciation while avoiding excessive risk.

Bear Market - When the stock market suffers a prolonged period of falling prices accompanied by widespread pessimism. (see Bull Market).

Beneficiary - An individual, institution, trustee, or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.

Benefit Exchange Plan - Non qualified compensation arrangement wherein a select group of key employees may "exchange" some or all of a taxable non qualified benefit program or future wages for a benefit of equal value owned by a Trust or adult children. Also known as a SERP SWAP.

Blue Chip Stock - Common stock of a company, usually large, with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products.

Bond - A debt instrument issued with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. A bond is generally a promise to repay the principal along with interest on a specified date (maturity).

Book Value - A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets.
The value of an asset as it appears on a balance sheet, equal to cost minus accumulated depreciation. Book value often differs substantially from market price.

Bull Market - When the stock market experiences a prolonged period of increasing prices accompanied by widespread optimism. (see Bear Market).).

Business Overhead Expense Insurance - Insurance policy designed to reimburse certain business expenses should a business owner become disabled.

Buy Sell Plan - A business agreement identifying what would happen to the ownership structure should there be a material change within the ownership of a company, e.g., death, disablity, divorce, termination. Buy Sell agreements are typically funded with insurance policies so that cash is available to compensate a departed owner's beneficiaries.

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Cash Balance Plan - A cash balance plan is a defined benefit plan that defines an employee's benefit as allocations (typically a percentage of pay) credited to an account with interest during a participant's service.

Cash Flow - A measure of financial health. Cash Flow equals cash receipts minus cash payments over a given period of time; or equivalently, net profit plus amounts charged off for depreciation, depletion, and amortization.

Cash Value - The amount of a permanent insurance policy available in cash, either by surrender, loan or withdrawal of basis. Also known as Cash Surrender Value or Surrender Value.

Corporate-Owned Life Insurance (COLI) - Life insurance owned by a company, insuring the lives of its employees. Prevelent funding vehicle for human resource liabilities (e.g., non-qualified retirement plans) and other organizational opportunities.

Constructive Receipt - The date when a taxpayer received taxable income according to the IRS. Whether or not income was actually received, constructive receipt is interpreted as the first date the taxpayer has the right to claim it without a substantial risk of forfeiture.

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Death Benefit - The amount of an insurance policy available upon the death of an insured person.

Death Benefit Only Plan (DBO) - A non-qualified benefit arrangement wherein a company agrees to pay an supplemental death benefit to a select employee's beneficiary should a premature death occur (generally while the executive is employed).

Deferred Compensation Plan - A non-qualified retirement plan which provide contributions and benefits for Highly Compensated Employees beyond what is available in qualified plans. Participants elect to defer compensation into an account to be distributed to them, with expected earnings, at retirement. Such plans involve no current taxation at the time of deferral and may involve company contributions. Also known as Excess Benefit Plans.

Deferred Stock Unit Account - A non-qualified plan wherein an executive elects to defer receipt of stock as income into an unfunded account that is designated and settled in shares of the company's stock

Defined Benefit Plan - A basic form of qualified pension plan in which the company specifies the benefit - based on salary and service - the plan will deliver. Typically involves only company contributions and the company bears the investment risk.

Defined Contribution Plan - A basic form of qualified pension plan, such as a 401 or 403 plan, in which the employee elects to defer some amount of his/her salary into the plan and bears the investment risk. The company may contribute via a match or distribution.

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ESOP - Employee Stock Ownership Plan, wherein a trust is established for the transfer of some or all of company to its employees over time. ESOPs are designed to motivate employees, as well as provide the company with tax benefits and/or a method for business succession.

ERISA - Employee Retirement Income Security Act of 1974 which established legal guidelines for private pension plan administration and investment practices.

Executive Bonus (§162) Plan - A non-qualified compensation arrangement wherein a company bonuses additional income to the employee to fund a permanent life insurance policy. Combining death benefit protection along with the deferral advantages of other non-qualified retirement plans; executive bonus plans are often used to provide supplemental retirement and insurance protection benefits.

FAS 106 - An financial accounting standard that requires a company to currently account for non-pension retirement benefits (e.g., post-retirement medical benefits).

Group Carve Out - A non-qualified benefit arrangement wherein all or part of an group term life coverage is replaced with company sponsored individual policies for select employees. Typically established as Split Dollar or Executive Bonus Plans.

Highly Compensated Employee (HCE) - A HCE is one who during the qualified plan discrimination testing period meets certain compensation and ownership requirements. By meeting these requirements, HCEs are able to participate in non-qualified retirement plans.

Insurance Company Owned Life Insurance (ICOLI) - Life insurance owned by a financial institution, insuring the lives of its employees. Prevelent funding vehicle for human resource liabilities (e.g., nonqualified retirement plans) and other organizational opportunities.

Incentive Stock Option (ISO) - A type of employee stock option which, if qualified, is free of tax at date of grant and exercise. Such options have tax advantages to the employer over NSOs, yet have more stringent requirements and administration.

Key Employee - A key employee for pension purposes (i.e., ERISA top heavy rules) must meet certain compensation and/or ownership requirements commensurate with participation in the company qualified plan during a specified timeframe.

Key Employee Disability Insurance - Insurance policy available to cover a percentage of expenses should a key employee become disabled.

Key Employee Life Insurance - Life insurance acquired to compensate a company for lost profits as well as replacement costs at the death of a key employee.

KSOP - form of Employee Stock Ownership Plan, wherein transfer of company stock to employees is accomplished through the company 401(k) plan.

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Long-term Care Insurance - An insurance policy that provides benefits for the chronically ill or disabled over a long period of time. These policies can apply to in-home as well as assisted living and nursing home care.

Mirror 401(k) - A non-qualified deferred compensation arrangement designed to mirror a company qualified plan design and/or funding.

Modified Endowment Contract (MEC) - Under the Internal Revenue Code, if cumulative premium deposits into a life insurance contract exceed certain levels in relation to the contract death benefit, the policy will become a Modified Endowment Contract (MEC). As a MEC, the tax treatment of any death benefit provided under the contract will still qualify for income tax free treatment. The contract may be subject to additional taxes and penalties on any distribution from the policy cash value during the lifetime of the insured.

Mutual Fund - An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets according to its stated set of objectives. Benefits include diversification and professional money management. Shares are issued and redeemed on demand, based on the fund's daily net asset value.

Nonqualified Deferred Compensation Plan(NQDC) - A nonqualified deferred compensation (NQDC) plan is any elective or nonelective plan, agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee compensation some time in the future. NQDC plans do not afford employers and employees with the tax benefits associated with qualified plans because, unlike qualified plans, NQDC plans do not satisfy all of the requirements of §401(a). As defined by IRS Nonqualified Deferred Compensation Audit Techniques Guide

Nonqualified Retirement Plan - retirement plan that does not meet ERISA requirements for favorable taxation and therefore is not subject to ERISA contribution or participation limits. Nonqualified plan benefits are unsecured and must remain unfunded to avoid current taxation. Benefits can be provided on a pay-as-you-go basis or "informally" funded with mutual funds or COLI.

Nonqualified Stock Option (NSO) - type of employee stock option which is less advantageous for the employer from a tax standpoint than ISOs, yet is less restrictive and generally easier to set up and administer.

Nuclear Decommissioning Trust (NDT) - A trust established to pay the costs of decommissioning nuclear power plants.

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Pay-as-You Go - A method for satisfying non-qualified retirement benefits whereby a company funds a promised benefit out of current surplus.

Performance Unit - Cash Awards (in the form of units) are provided based on meeting of key company performance criteria; generally not stock value. These units are similiar to a share of stock yet do not represent ownership in the company. They can rise and decline in value and if desired, can be subject to a vesting schedule .

Product Settlement - Also known as, Viatical Settlement, the purchase of a mature life insurance policy in return for a certain percentage of the policy's face value in cash.

Professional Retirement Supplement Plan (PRSP) - Non qualified compensation arrangement wherein professionls (shareholders) within a professional entity utilize third party lender funds (in a factored amount of the professional's accounts receivable) to obtain a supplemental retirement asset in the form of an annuity and life insurance contract on the professional's life. This arrangement provides for development of a tax advantaged retirement account while avoiding the exposure to corporate creditors found with other deferred compensation arrangements.

Professional Employer Organization (PEO) - A PEO is a staffing organization that provides outsourced Human Resources, Employee Benefits & Insurance, Payroll, Administration, Legal, and Compliance as well as Safety & Loss Control services. Non qualified deferred compensation via a PEO is accomplished by having deferrals and contributions held in a trust by the co-employer PEO. While this does address the issue of access to such non qualified assets by general creditors of the company, these assets would then be available to the PEO.

Profit Share - An arrangement in which an employer shares its profits with its employees. The compensation can be stocks, bonds, or cash, and can be immediate or deferred until retirement.

Projected Benefit Obligation (PBO) - The anticipated value of retirement benefits to be earned by an employee's retirement date.

Qualified Retirement Plan - A retirement plan that qualifies for favorable tax treatment under ERISA, and is subject to contribution limitations and other regulations. Qualified plan benefits are legally secured in trust. Also known as Pension Plan.

Rabbi Trust - A trust set up by the company, that holds assets intended to meet non-qualified retirement benefit payments.  Rabbi trusts are taxable trusts which are available to corporate creditors, yet are not available for other company uses.

Security - An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity.

Secular Trust - An irrevocable trust set up by the company, that holds assets intended to meet non-qualified retirement benefit payments. Like rabbi trusts, secular trust are taxable trusts, however taxes are due at the time of the contribution and higher trust tax rates. In contrast to a rabbi trust, a secular trust is beyond reach of corporate creditors, providing additional protection the event of bankruptcy.

Security Option Plan (SOP) - Non qualified compensation arrangement wherein companies proide the executive stock options, While traditional Stock Option Plans use company stock, the Security Option Plan uses any publically traded security as the option property. This plan is quite popular in For Profit companies (that do not value their stock). As a non qualified stock option plan, the company will allow for capital gains taxation as wall as additional flexibility with respect to deferral/pay out elections and pre-retirement plan access.

SEP - A Simplified Employee Plan is a qualified retirement plan wherein an employer makes deposits into an Individual Retirement Account or Individual Retirement Annuity set up for an employee. Set up for smaller companies which have no other qualified plan.

SIMPLE - A Savings Incentive Match Plan is a qualified retirement plan wherein an employee can receive cash or have employer contributions held in trust for retirement. Generally set up for smaller companies which have no other qualified plan; can be either set up as IRA or 401(k).

Sinking Fund - A fund into which a company sets aside money over time, in order to meet its benefit obligations, or retire its preferred stock, bonds or debentures.

Split Dollar - Non-qualified compensation arrangement whereby a company informally funds a benefit by "splitting" the deposits and benefits of a permanent life insurance policy with a selected employee. Combining death benefit protection along with the deferral advantages of other non-qualified retirement plans, split dollar is often used to provide supplemental retirement and insurance protection benefits.

Stakeholder Stock Plan (SSP) - A form of non-qualified retirement arrangement wherein the company grants stock units (or phantom) stock - rather than real shares of a company stock - based on prescribed performance measures over a specified period of time. Also known as Phantom Stock Plan.

Stock Appreciation Rights (SAR) - A form of stock option where the employee receives the right to receive the value of any appreciation in the underlying stock which took place from the date of grant to the date of exercise. An employee can benefit from stock appreciation without buying the stock, as well as have funds should they wish to buy the stock. Such rights may create unwarranted P&L and stock price fluctuations.

Substantial Risk of Forfeiture - IRS rule governing the vesting and taxation of non-qualified retirement plans. In order that a plan participant not have constructive receipt (full & immediate taxation) the participant must not have unilateral access to their account; i.e., the agreement limits participants authority to withdraw funds; the participant is not vested.

Supplemental Executive Retirement Plan (SERP) - A non-qualified deferred compensation arrangement wherein the company agrees to provide an additional retirement benefit on a either defined benefit or a defined contribution basis. Generally, benefits are paid from the employer's general assets, and no amounts are specifically earmarked for future benefit payments. Also known as Top Hat, Benefit Restoration or Make Whole Plans.

Term Insurance - Temporary insurance that provides death protection for a defined period of time. There is no savings component or benefit in term insurance.

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Top Heavy - IRS rule governing accruals that can be maintained in a qualified plan by a Key Employee (managers earning certain income levels). The general purpose of this rule is to keep an appropriate accrual and contribution balance among all employees. Plans that fail top heavy testing requirements are subject to disqualification under ERISA.

Trust-Owned Life Insurance (TOLI) - Life insurance owned by a trust to help fund post-retirement medical expenses inside a VEBA. As life insurance, provides long term tax effective funding vehicle, with benefits realized when an insured dies. TOLI differs from Trust-Owned Health Insurance (TOHI) which is also often used to fund actual medical costs of post-retirement medical expenses inside a VEBA.

Universal Life Insurance - A type of permanent life insurance which combines the low-cost protection of term insurance with a bond based savings component that is invested in a tax-deferred account and can be used for wealth accumulation. Universal life policies are designed to provide greater flexiblity with respect to timing and amount of deposits.

Voluntary Employee Beneficiary Association (VEBA) - A corporate trust used to fund the costs of certain long-term benefit liabilities, such as post-retirement medical costs.

Variable Life Insurance - A type of permanent life insurance in which cash values are invested in separate equity account funds, as determined by the policy owner. The value of the policy varies based on the ongoing market value of chosen fund assets. Due to the nature of equities, such policies have greater inherent risk/reward than whole life insurance.

Variable Universal Life Insurance - A type of permanent life insurance which combines the benefits of universal life with the growth potential of variable life insurance.

Whole Life Insurance - A type of permanent life insurance which provides coverage for an individual's whole life, rather than a specified term. A bond based savings component, called cash value or loan value, builds over time in a tax-deferred account and can be used for wealth accumulation. Due to the bond based nature whole life, such policies have lesser inherent risk/reward than variable life insurance.

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