Serving North Carolina's Piedmont Triad and Beyond


The definitions provided here are brief and are intended to give a general overview.

Account Statements

Prepared statements sent to participants following periodic valuations showing account balances and transactions (contributions, investment earnings, etc). Prepared statements must be given to participants at least annually. A plan may provide on-demand access to account balances via website or telephone.

Accrued Interest

The amount of interest earned but not paid as of a specified date, generally on a bond or certificate of deposit. When purchasing a bond, the buyer pays the price of the bond plus any accrued interest.

ACP Test

The Actual Contribution Percentage Test is an annual non-discrimination test applied to employer matching contributions and certain employee contributions.

ADP Test

The Actual Deferral Percentage Test is an annual nondiscrimination test applied to elective deferrals made under a section 401(k) arrangement (see CODA).


An annuity is a series of periodic payments over a specified period of time. The payments may come from plan assets or by purchase of a contract from a life insurance company. Payments are often for the lifetime of beneficiaries, perhaps with a guaranteed minimum payment period.


Increase in the value of an investment over a specified period of time.

Ask Price

The price a seller is willing to accept for a security, alternatively known as the offer price.


The American Society of Pension Professionals and Actuaries is a non-profit professional organization seeking to preserve and enhance the private pension system and to educate retirement plan and benefits professionals. ASPPA represents committed individuals of the profession those who have made a career of retirement plan and pension policy work. ASPPA has expanded and diversified its membership now over 5,400 to include all types of pension professionals: actuaries, consultants and administrators, insurance professionals, financial planners, accountants, attorneys, and human resource managers. For more information, see, or go to “Links.”


An asset has probable future economic benefit to its owner. Examples of assets in a plan are cash, real estate, common stock, bonds, mutual funds and life insurance.

Asset Allocation

Some plans require participants to select their individual investment mix, allowing changes to the mix daily or less frequently. Deciding how you will divide your investment portfolio among the major asset categories (asset allocation) is one of the most important investment decisions you will make.

Asset Allocation Fund

A common trust fund or mutual fund that invests its portfolio among major asset categories, according to a specified policy. Examples of major asset categories are stocks and bonds of domestic or foreign companies, government securities, and real estate. See Common and/or Collective Trust. See Mutual Fund.

Automatic Enrollment

The practice of enrolling an eligible employee in a plan in the absence of the employee’s affirmative Salary Reduction Agreement. The Plan Document and the Summary Plan Description specify amounts to withhold from eligible employees’ paychecks. Generally, the Trustee decides how these automatic contributions will be invested. See Salary Reduction Agreement, Plan Document, Summary Plan Description, and Trustee.

Balance Sheet

A plan’s Trust statement reporting on the current value of assets and liabilities at the beginning and end of the plan year, filed as an attachment to the plan’s Form 5500. See Trust. See Form 5500.

Balanced Fund

A common trust fund or mutual fund that maintains a balanced portfolio, for example, 50% bonds and 50% common stocks. Generally, the investment managers can change the percentages. See Mutual Fund. See Common and/or Collective Trust.

Bid Price

The price a buyer is willing to pay for a security.

Blackout Period

A period of time during which participants are not permitted to make transactions of any kind: loans, withdrawals, distributions, or changes to individual investment mix. Blackout periods typically occur when a plan sponsor changes to a different investment provider.


An “I-owe-you” issued by a company or governmental entity. The issuer promises to pay back the original investment (loan or principal amount) after the end of a period of time (at maturity). Bonds generally pay a specific rate of interest, payable at various intervals over the life of the bond (i.e., quarterly or semi-annually).

Call Option

The right to purchase a security at a specified price within a specified time period.

Callable Bond

A Bond that can be redeemed (paid in full) by the issuer prior to its maturity. See Bond.

Catch-Up Provision

Some 401(k) plans permit participants who have attained age 50 to make additional elective deferrals in excess of amounts normally permitted. These additional elective deferrals are called “catch-up” contributions. For example, a plan may allow participants to defer up to the maximum dollar amount allowed by law, as well as allowing “catch-up” contributions to be made. In this example, assuming no other plan or statutory limitations, a 50 year old may contribute $20,500 in 2007; a younger participant would be limited to $15,500. See CODA.

Certificate of Deposit

A bank deposit that pays a specified rate of interest for a certain period of time.


Excessive trading (buying and selling of securities) within an investment account, often generating commissions and other expenses. Excessive trading may not be in the best interest of plan participants.

Cliff Vesting

A type of vesting schedule that is 0% for a specified number of Years of Service, after which it jumps to 100%. For instance, with a 3-year cliff vesting schedule, a participant is 0% vested until he has accumulated 3 Years of Service, at which point he becomes 100% vested. See Vesting. See Forfeiture.


A Cash Or Deferred Arrangement (CODA) provides that an employee can elect to have part of his wages contributed to a plan, instead of receiving the amount in cash. The amount contributed is not currently taxable if the CODA satisfies certain requirements of the Internal Revenue Code. The amount contributed is called an elective deferral. With rare exceptions, profit sharing plans and stock bonus plans are the only types of qualified plans that are allowed to have a CODA. A 401(k) plan is a profit sharing plan which includes a CODA. Often the term CODA is used interchangeably with “401(k) arrangement.” See Salary Reduction Agreement, Automatic Enrollment, and ADP Test.


Broker’s fee for buying or selling securities or insurance products.

Common and/or Collective Trust

(CCT) Common and/or Collective Trust is a fund managed by the trust department of a bank. Many unrelated qualified retirement plans invest in these funds. It is a single fund of diversified securities, similar to a mutual fund.

Common Stock

An investment representing residual ownership interest in a corporation. Prices of publicly traded shares of common stock are reported daily.


The result of reinvesting investment earnings and consequent generation of earnings on those reinvested earnings.


Deposits to a plan by the employer or employee, or both. Employee contributions may be a percentage of pay, as a payroll deduction. Employer contributions to a Defined Contribution Plan may be based on a percentage of the employee’s contribution, a percentage of the employee’s pay, or both. An employer may formulate its Defined Contribution Plan contribution in a variety of ways. An actuary determines the employer contribution to a Defined Benefit Plan. See Defined Contribution Plan. See Defined Benefit Plan.

Defined Benefit Plan

In a Defined Benefit Plan, individuals do not have separate account balances. Instead, an individual’s monthly benefit at retirement is defined, usually payable for life. The employer deposits contributions which, together with earnings, are to provide funds adequate to cover future retirement benefits as they become payable to each participant. In a Defined Benefit Plan, the employer bears the risk of investment gains and losses, not the employee. Compare with Defined Contribution Plan.

Defined Contribution Plan

In a Defined Contribution Plan, each individual has a separate account balance. The employer deposits a contribution allocated to each participant’s account in an amount and manner defined in the Plan’s legal document. However, the Plan Document specifies the method of allocation among participants not necessarily a contribution amount. In a defined contribution plan, there is no guaranteed benefit at retirement. The individual receives the sum of all contributions and earnings (or losses) allocated to his account. In a Defined Contribution Plan, the employee bears the risk of investment gains and losses, not the employer. Compare with Defined Benefit Plan. See Plan Document.


Decrease in the value of an investment over a specified period of time.


To begin participating in a plan, an employee must meet certain eligibility requirements; for example, attainment of age 21 and completion of a Year of Service.

Entry Date

Date an employee begins to participate in the plan. Examples could be the next semi-annual entry date (January 1 or July 1 for calendar year plans), or the first of the month coincident with or next following completing eligibility requirements.


An Employee Stock Ownership Plan (ESOP) is a defined contribution plan that invests primarily in employer securities. See Defined Contribution Plan.


The non-vested portion of the benefit of a participant who terminated employment prior to becoming 100% vested. For example, if an employee terminated with 20% vesting, his Forfeiture is 80% of his account balance or benefits derived from plan contributions made by the employer. Typically, Forfeitures reduce future employer contributions or are allocated to the remaining participants, often after a specified waiting period. See Vesting.

Form 5307/5300

A special application requesting an IRS “determination letter” confirming a plan’s tax-exempt status.

Form 5500

An annual filing by the Plan Administrator reporting on compliance and financial aspects of the plan. Plans with more than 100 participants require an opinion statement by a Certified Public Accountant. Plans with less than 100 participants may also require an opinion statement by a CPA if funds are invested in certain types of assets. See Plan Administrator.

Gains, Realized and Unrealized

An increase (or decrease) in the value of an asset, such as common stock, over a specified period of time. Realized gains (or losses) occur when the asset is sold. If the asset is not sold, any increase (or decrease) in the value of the asset is considered an “unrealized gain” (or an “unrealized loss”).

Highly Compensated Employee

An employee is considered to be a Highly Compensated Employee (HCE) if the employee satisfies specific ownership or compensation tests. Employees who are not Highly Compensated Employees are designated as Non Highly Compensated Employees (NHCE). In performing various annual nondiscrimination tests, Highly Compensated Employees must be identified.

Key Employee

An employee is considered a Key Employee if the employee satisfies specific ownership, compensation, and/or officer tests. Employees who are not Key Employees are designated as Non-Key Employees. In performing top-heavy determination, Key Employees must be identified. See Top-Heavy Plan.


A liability is an obligation representing future sacrifice of economic benefits. Examples of liabilities in a plan are: (1) benefit claims that have been approved and processed for payment by the plan but have not been paid and (2) obligations owed by the plan that were incurred in the normal operations of the plan but have not been paid.

Money Purchase Pension Plan

A Money Purchase Pension Plan is a type of Defined Contribution Plan with a fixed contribution formula that is not subject to the employer’s discretion or the profits of the company. A common contribution formula in a Money Purchase Pension Plan is a contribution equal to 5% of each participant’s compensation. See Defined Contribution Plan.

Mutual Fund

An investment company which uses its capital to invest in diversified securities of other companies. The Mutual Fund offers new shares or buys back existing shares at the request of the shareholder.

Non-Discrimination Testing

Annual battery of tests required by the IRS demonstrating that a plan provides benefits within Internal Revenue Code limitations on discrimination in favor of Highly Compensated Employees. See Highly Compensated Employee.

Plan Administrator

The Plan Administrator is the person or persons designated to be responsible for the administration or operation of the plan. If the plan is maintained by a single employer and the Plan Administrator is not specifically designated, the employer is the Plan Administrator.

Plan Document

If the plan is intended to be a qualified plan, then the written Plan Document must state all of the applicable requirements of Internal Revenue Code 401(a), such as eligibility and vesting requirements, how benefits are determined, and when benefits may be distributed. The written terms of the Plan Document control how the plan is to be administered.

Plan Sponsor

The business entity that maintains the plan (usually the employer) is the Plan Sponsor.

Profit Sharing Plan

A Profit Sharing Plan is a type of Defined Contribution Plan. Typically, contributions are made at the employer’s discretion. See Defined Contribution Plan. See CODA.

Salary Reduction Agreement

This is an agreement between an employee and employer under which the employee elects to reduce cash compensation and the reduction in compensation becomes a contribution made to a plan. The amount contributed is called an elective deferral.


A SARSEP is a Simplified Employee Pension that includes a Salary Reduction Arrangement. Contributions are made according to the employee’s election to defer cash compensation. The employer deposits contributions to the participant’s IRA. No trust is established. A SARSEP is not a qualified plan. After December 31, 1996, new SARSEPs cannot be established; however, SARSEPs established on or before December 31, 1996 may continue to receive contributions. SARSEPs must satisfy an annual nondiscrimination test applied individually to each Highly Compensated Employee. See SEP. See Highly Compensated Employee. See Salary Reduction Arrangement.


A document providing evidence of ownership or creditorship, such as a stock certificate or bond.


In a Simplified Employee Pension (SEP), the employer deposits contributions to the participant’s IRA. No trust is established. The participant owns the SEP-IRA. A SEP is not a qualified plan, but nevertheless is subject to some similar regulations.


A SIMPLE-401(k) plan is similar to the SIMPLE-IRA except that a SIMPLE-401(k) has a Trust, and eligibility may be more stringent. A SIMPLE-401(k) is a qualified plan. The annual administration and reporting requirements for a SIMPLE-401(k) are the same as for other qualified plans, such as 401(k) plans; however SIMPLE-401(k)s are exempt from some nondiscrimination tests. See SIMPLE-IRA. See Trust. See Eligibility.


Savings Incentive Match Plans for Employees replace SARSEPs after December 31, 1996. All contributions are made to the participant’s IRA. No trust is established. A SIMPLE-IRA is not a qualified plan. The participant owns the SIMPLE-IRA. The SIMPLE-IRA includes a salary reduction arrangement. Contributions are made according to the employee’s election to defer cash compensation. The employer is required to match the employee’s contribution or provide a contribution for all eligible employees. All contributions are 100% vested. The SIMPLE-IRA must be the only plan maintained by the employer for the calendar year. An employer is eligible to maintain a SIMPLE-IRA if the employer has 100 or fewer employees earning at least $5,000 in the prior calendar year. An eligible employee is defined as any employee earning $5,000 in any two prior calendar years and is expected to earn at least $5,000 in the current calendar year. See SARSEP.

Solo 401(k) Plan

A Solo 401(k) Plan has only one participant, generally the owner-employee of the sponsoring entity, such as a sole proprietorship. Such a plan is appropriate where the sponsoring entity has no common law employees. Solo 401(k) Plans have become popular because of the changes in tax deductibility of contributions. See CODA. See Defined Contribution Plan. Compare with Defined Benefit Plan.

Solo Defined Benefit Plan

A Solo Defined Benefit Plan has only one participant, generally the owner-employee of the sponsoring entity, such as a sole proprietorship. Such a plan is appropriate where the sponsoring entity has no common law employees. See Defined Benefit Plan.

Summary Plan Description

The Summary Plan Description (SPD) is a brief outline of a Plan Document’s main provisions, written in understandable language, and given to all participants. See Plan Document.

Target Benefit Plan

A Target Benefit Plan is a type of Money Purchase Pension Plan. The plan targets a benefit formula used to calculate the annual employer contribution. See Money Purchase Pension Plan.

Top-Heavy Plan

A plan is top-heavy for any plan year if the accrued benefits of key employees under the plan exceed 60 percent of the aggregate of the accrued benefits of all employees under such a plan. Generally, in performing a top-heavy test, all plans of the employer are aggregated to determine accrued benefits. Top-heavy plans are subject to minimum contribution and vesting requirements. See Key Employee.


The Trust is the funding vehicle of the qualified plan. The provisions of the Trust are included in the Plan Document, or in a separate document. See Plan Document.


The Trustee is generally the person(s) named in the Trust as the Trustee. The Trustee has exclusive authority and discretion to manage or control the assets of the plan.


The extent to which an employee has a right to receive benefits derived from plan contributions. This is called a nonforfeitable right.

Vesting Schedule

A schedule showing how an employee can become 100% vested over a period of time. There are various types of vesting schedules. A Top-Heavy Plan may be required to accelerate its vesting schedule. Participants are always 100% vested in employee contributions. See Top-Heavy Plan.

Year of Service

A 12-month period in which an employee works not less than a specified number of hours (generally not to exceed 1,000 hours). Alternatively, service can be measured as elapsed time, regardless of number of hours worked.