Glossary of Terms

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Qualified pension plan
A pension plan within the meaning of Section 401(a) of the Internal Revenue Code, established and maintained by an employer primarily to provide for the payment of benefits to employees over a period of years, usually for life, after retirement. The major requirements are that the plan be in writing, be permanent, be for the exclusive benefit of employees or their beneficiaries, and not be discriminatory in favor of officers, stockholders, supervisors or higher paid employees. A qualified plan (meaning it has been approved by the IRS) will receive favorable tax treatment. Employer contributions constitute a business deduction in determining the employer's taxable income; employer contributions are not regarded as employee earnings and are, therefore, not taxable to the employee; and the earnings of the pension fund are not subject to current income tax.

Qualified profit-sharing plan
A plan established and maintained by an employer to provide for the participation by employees in the company's profits. The plan must provide a definite, predetermined formula for allocating the contributions made to the plan among the participants and for distributing funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event, such as hardship.

Rating
The making of insurance rates. Also, the premium classification given an individual who makes application for life or health insurance and, most commonly, when the applicant is designated as a substandard risk. A higher premium reflects the increased risk.

Reinsurance
The sharing or spreading of a risk too large for one insurer by ceding part of the risk to another company or reinsurer. For example, most companies place a limit on the amount of insurance they will risk on a single life; therefore, when issuing policies for larger amounts than their own limit, they cede the excess over that limit with a reinsurance company for a portion of the premium.

Respite care
Care provided either by paid workers who come to the home for short periods of time or by a nursing facility when a patient stays for a short period of time to give family members a rest.

Retirement income policy
A life insurance contract designed to provide old-age security, emphasizing a guaranteed monthly income for life, beginning at a certain age, usually 65. Such policies are generally sold in units of monthly life income. Unlike annuities, they also provide a death benefit.

Revocable trust
A trust in which the donor retains income rights, as well as the right to terminate the trust and recover the property. Such trusts will eliminate probate costs and may also qualify for estate tax marital deduction.

Section 79 plan
A group term life insurance plan under Section 79 of the Internal Revenue Code, whereby the employer pays the premiums. The employee must report as gross income only the cost of insurance over $50,000. When properly arranged, the cost of the premiums is also fully deductible by the employer.

Section 162
Section 162 of the Internal Revenue Code provides that employer-paid premiums for group term life insurance are deductible to the firm as an employee benefit expense.

Section 303
Section 303 of the Internal Revenue Code permits an estate to sell stock of a family corporation to the corporation on an income tax-free basis when the proceeds of such sale are to be used to pay taxes and other costs of estate administration and settlement.

Section 403(b) plan
Under Section 403(b) of the Internal Revenue Code, a qualified retirement plan for employees of 501(c) organizations and educational institutions, whereby contributions are used to purchase annuities or mutual fund shares by employers for employees. The plan must not be part of another qualified pension or profit-sharing plan, must be nonforfeitable to the employee, and contributions must not exceed a specified limit. The funds in the plan are nontaxable until they are taken as income in retirement.

Section 501(c)(3) organization
Under Internal Revenue Code Section 501(c)(3), organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes. No organization qualifies if it carries on propaganda or if its net earnings benefit any private individual.

Short-term policy
An insurance contract in effect for less than one year.

Social Security
Programs provided under the United States Social Security Act, originally passed in 1935 and now including Medicare, Medicaid, OASDI and a variety of grants-in-aid. Government programs that provide economic security to the public. For example, social insurance, public assistance, family allowances, grants-in-aid, maternity benefits, etc.

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