Actuary
Actuarial assumptions
Actuarial attestation
Actuarial valuation
Defined benefit pension plan
Cash balance plan
Cross-tested plan
ERISA
Excess benefit plan
Form 5500
Hybrid pension plan
Non-qualified plan
Nondiscrimination testing
PBGC
Retiree medical plan
SERP
SFAS 87 valuation
SFAS 106 valuation
Top-hat plan

Actuary – a highly trained financial professional who measures future liability of defined benefit pension, retiree medical and other post-retirement benefit plans. Actuaries are trained in all aspects of these plans — plan design, implementation and administration.

Actuarial assumptions – assumptions made about variables that affect the liabilities of defined benefit pension, retiree medical and other post-retirement benefit plans. Actuarial assumptions include investment return, pay increases, mortality and benefit commencement date.

Actuarial attestation – a certification by an actuary that the prescription drug coverage of a company's retiree medical plan is at least as valuable as the Medicare Part D prescription drug coverage. The actuarial attestation is required to be submitted annually to CMS (Centers for Medicare & Medicaid Services) in order for the company to receive the 28% federal subsidy.

Actuarial valuation – performed by an actuary to measure liabilities in a defined benefit pension, retiree medical and other post-retirement benefit plan. An actuarial valuation includes a report of recommended plan contributions and expenses by the company sponsoring the plan.

Defined benefit pension plan

• A defined benefit pension plan is sponsored by a company for its employees.
• The plan promises to pay a monthly benefit beginning at retirement age.
• The benefit is based on a formula that usually involves the employee's pay and years of service.
• Each year, an actuary determines the amount of contribution the sponsoring company should make to a trust fund so all benefits are funded by the time benefit payments begin.
• Plan contributions are calculated based on a number of actuarial assumptions, which will not be precisely realized (e.g., employee pay, employee turnover and investment return on assets). Small differences between assumed and actual experience can cause significant changes in the plan's required contribution.
• As with a 401(k) plan, benefits accumulate on a tax-deferred basis until they are paid at retirement, termination of employment or termination of the plan. Plans sponsored by small business owners generally allow actuarial equivalent benefits to be paid in a lump sum distribution. As with a 401(k) plan, these lump sum distributions may be rolled over to an IRA.

Cash balance plan – a defined benefit pension plan that has some characteristics of a 401(k)/profit sharing plan. Instead of promising a monthly lifetime benefit, the plan establishes an individual account for each covered employee. Each year, the account is credited with a contribution "credit," which is usually a percentage of the employee's pay. In addition, the account is credited with interest "credits" that are tied to a particular type of investment (e.g., five-year treasury bill).

Cross-tested plan - a defined benefit plan that is tested for nondiscrimination purposes on the basis of contributions, or it is a profit sharing plan that is tested on the basis of benefits.

ERISA – Employee Retirement Income Security Act of 1974.

Excess benefit plan – a non-qualified plan designed to provide employees with benefits that cannot be paid by a qualified plan because they exceed certain government limits.

Form 5500 – the government-required, annual information return filed by sponsors of defined benefit pension plans.

Hybrid pension plan – a broad term that refers to a number of plan designs that differ from the traditional defined benefit pension plan. A traditional plan describes the benefit as a monthly, lifetime annuity. A hybrid plan often describes benefits in terms of a lump sum (e.g., 10 times final average pay).

Non-qualified plan – a term generally used to include excess benefit plans, SERPs and top-hat plans. These plans do not have the tax advantages of a qualified retirement plan.

Nondiscrimination testing – a process of determining whether a defined benefit pension plan satisfies the nondiscrimination in benefits requirements of the Internal Revenue Code. Plans that satisfy certain "design-based" safe harbors are automatically deemed to satisfy nondiscrimination rules and no further testing is required. Other plans require periodic testing to prove that they continue to be nondiscriminatory.

PBGC – Pension Benefit Guaranty Corporation, a nonprofit, quasi-governmental organization that insures defined benefit pension plans.

Retiree medical plan – a plan sponsored by a company that provides medical benefits to its retired employees who meet certain age and service requirements.

SERP – a non-qualified plan that covers a broader range of situations than excess benefit plans.

SFAS 87 valuation – a report prepared by an actuary determining liabilities and costs for a defined benefit pension plan, in accordance with a pronouncement by the Financial Accounting Standards Board, which dictates how financial statements are prepared in the U.S. A company that sponsors a defined benefit pension plan and has audited financial statements will need SFAS 87 valuation.

SFAS 106 valuation – a report prepared by an actuary determining liabilities and costs for certain benefit plans, in accordance with a pronouncement by the Financial Accounting Standards Board, which dictates how financial statements are prepared in the U.S. A company that sponsors retiree medical or other post-retirement benefit plans other than pensions and has audited financial statements will need SFAS 106 valuation.

Top-hat plan – a non-qualified plan designed primarily to provide retirement benefits to a select group of management or highly compensated employees.

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