What do the plan words mean?

A 412(e)(3) plan, once called a 412(i) plan, is a defined benefit plan funded only by individual insurance or annuity contracts with level annual premiums, no policy loans and no contract pledged as security. A plan that meets every condition in section 412(e)(3) is exempt from the minimum funding rules. A plan that holds market investments is not one.

What is a 412(e)(3) plan?

An accrued benefit is the part of the promised pension a person has earned so far. In a traditional defined benefit plan the tax code expresses it as a yearly benefit starting at normal retirement age. In a cash balance plan the plan may state it as the balance of the person’s hypothetical account instead.

A cash balance plan is a defined benefit plan that states each person’s benefit as the balance of a hypothetical account, built from yearly pay credits and interest credits. The tax code calls it an applicable defined benefit plan. The employer funds one pooled trust for everyone in the plan and bears the investment risk.

A cash balance plan is not a cash management account, which is a cash product a brokerage firm offers. The two share a word and nothing else.

What is a cash balance plan?

A controlled group is a set of businesses tied together by common ownership. For retirement plan rules, the tax code treats all employees of all corporations in a controlled group as employed by a single employer, and it applies the same idea to businesses under common control and to affiliated service groups. Staff of a related business can count.

A custodian is the bank, trust company, brokerage firm or insurance company that holds a plan’s money and investments for the plan. Federal rules require the plan’s summary description to name any institution that maintains a fund on behalf of the plan. Under federal pension law the trustee, not the custodian, controls how the assets are managed.

Who holds my money?

A defined benefit plan is a pension plan that promises each person a set benefit at retirement and requires the employer to fund whatever that promise costs. Federal pension law defines it as a pension plan other than an individual account plan, and the tax code defines it as any plan which is not a defined contribution plan.

What is a defined benefit plan?

A defined contribution plan, also called an individual account plan, gives each person an account and pays benefits based only on what went into the account and what it gained or lost. A 401(k) and a profit sharing plan are both defined contribution plans. For 2026, total additions to one person’s account are capped at $72,000.

An enrolled actuary is an actuary enrolled by the Joint Board for the Enrollment of Actuaries, the federal board that sets the standards for actuaries who work on pension plans. An enrolled actuary values a defined benefit plan each year, figures the minimum and maximum contribution and signs the plan’s Schedule SB.

ERISA, the Employee Retirement Income Security Act, is the federal pension law. ERISA sets rules for reporting, disclosure, fiduciary duty, vesting, funding and plan insurance, alongside the Internal Revenue Code. ERISA is a statute, not an agency, and the Department of Labor and the IRS enforce most of its rules for a small business plan.

A fiduciary is anyone who exercises discretionary authority or control over managing a plan, or any authority or control over its assets, gives investment advice for a fee, or has discretionary authority in running the plan. A fiduciary must act solely for the people in the plan and is personally liable for losses a breach causes.

Form 5500 is the yearly return and report a retirement plan files with the federal government. A defined benefit plan files it with Schedule SB, signed by an enrolled actuary. The form is due by the last day of the 7th calendar month after the plan year ends, and Form 5558 can extend it once, by up to 2½ months.

Form 5500-EZ is the short yearly return for a one-participant plan, meaning a plan that covers only the business owner, or the owner and spouse, or only partners and their spouses. A defined benefit plan filing it still needs a Schedule SB, which the enrolled actuary completes, signs and sends to the person who files the return.

A plan’s funding target is the present value of all benefits the people in the plan have earned as of the first day of the plan year. The enrolled actuary compares it with the plan’s assets. When the assets fall short, the gap is paid off over 15 plan years as part of the minimum required contribution.

A highly compensated employee is someone who either owned more than the share of the business that section 414(q) of the tax code sets, in the current or prior year, or was paid more than the pay threshold in the prior year. IRS Notice 2025-67 keeps that threshold at $160,000. The coverage tests compare these employees with everyone else.

A hypothetical account is the account a cash balance plan keeps on paper for each person. The plan adds pay credits and interest credits to the account, and the tax code lets the plan state the person’s benefit as its balance. No money sits in a hypothetical account; the money sits in one trust for everyone in the plan.

An interest credit is the amount a cash balance plan adds to each account each year at the rate the plan document sets. The tax code caps the rate at a market rate of return, and a fixed rate of up to 6 percent is within the safe harbor. The credit is a promise, not a prediction of investment returns.

A key employee, for the top-heavy test, is an officer paid more than $235,000 in 2026, or an owner who meets the ownership tests in section 416(i) of the tax code. When key employees hold more than 60 percent of a plan’s benefits, the plan is top-heavy and must give the other employees a minimum benefit and faster vesting.

A listed transaction is an arrangement the IRS has named in published guidance as a tax avoidance transaction, which anyone taking part must disclose. For pension plans, Rev. Rul. 2004-20 lists a plan where the employer deducts premiums on life insurance whose death benefit exceeds the participant’s plan death benefit by more than $100,000.

Is this legal?

A lump sum is a single payment of a person’s whole vested benefit instead of payments over time. Section 417(e)(3) of the tax code sets the lowest value a plan may pay as a lump sum in place of a pension. A vested benefit worth more than $7,000 cannot be paid out right away without the person’s consent.

When can I take money out?

The minimum required contribution is the least a business must pay into its defined benefit plan for a plan year. The amount is the year’s normal cost plus installments on any funding shortfall. The payment is due eight and a half months after the plan year ends, and an unpaid minimum draws a 10 percent excise tax.

When is the deadline to start?

Normal cost, which the tax code calls target normal cost, is the present value of the benefits the people in the plan are expected to earn during the plan year, plus the plan’s expected expenses paid from plan assets, less any mandatory employee contributions. Normal cost is the starting point of each year’s minimum required contribution.

A pay credit is the amount a cash balance plan adds to each person’s account each year for that year’s work, often a percentage of pay that the plan document sets. Together with the interest credit, the pay credit builds the account balance the plan promises to pay.

The Pension Benefit Guaranty Corporation (PBGC) is the federal agency that insures most private defined benefit plans, but not all. A professional service employer’s plan that has never had more than 25 active participants at any time after September 2, 1974 is not covered, and neither is a plan maintained only for owners of more than 10 percent.

The plan sponsor is the business that sets up and maintains the plan. Federal pension law names the employer as the plan sponsor of a plan established or maintained by a single employer. The sponsor adopts the plan document, makes the contributions and is the plan’s administrator unless the plan document names someone else.

A rollover moves a distribution from one retirement plan into another plan or an individual retirement account without current tax. A person who receives a distribution generally has 60 days to roll it over, and the IRS can waive that deadline in some cases. Some payments, such as a series of equal payments for life, cannot be rolled over.

Schedule SB is the actuarial schedule a single-employer defined benefit plan attaches to its yearly Form 5500. The schedule reports the plan’s actuarial information, including its assets, its funding target and its minimum required contribution, and an enrolled actuary must sign it. A missing schedule draws a penalty of $1,000 for each failure.

Plan termination is the formal end of a plan. When a plan ends, every affected employee becomes fully vested in the benefits earned to that date, to the extent funded, and the plan pays out what it owes. The regulations expect a plan to be permanent unless business necessity ends it.

How do I end the plan?

A defined benefit plan is top-heavy when the present value of key employees’ accrued benefits exceeds 60 percent of the present value of everyone’s. A top-heavy plan must give each other employee a minimum benefit of 2 percent of average pay for each year of service, up to 20 percent, and must vest faster.

What do my employees get?

A trustee is the person or company that holds a plan’s assets in trust and has exclusive authority to manage and control them, unless the plan puts the trustee under a named fiduciary’s direction. In many small plans the business owner is the trustee, and a trustee is a fiduciary who can be personally liable for losses.

Who holds my money?

Vesting is the point at which a person’s benefit becomes nonforfeitable, meaning unconditional and legally enforceable against the plan. A cash balance plan must vest a person fully after 3 years of service. A traditional defined benefit plan may use a 5-year cliff, or 20 percent at 3 years rising to 100 percent at 7.

What do my employees get?