GLOSSARY

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="122285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>Non-Qualified Plans</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="NonQualified Plans"><U><B>home</B></U></A><B>    |     </B><A HREF="id16.htm" TARGET="_top" TITLE="TABLE OF CONTENTS"><U>TABLE OF CONTENTS</U></A>   |   <B>GLOSSARY</B>   |   <A HREF="id63.htm" TARGET="_top" TITLE="Review"><U>Review</U></A>   |   <A HREF="id18.htm" TARGET="_top" TITLE="FINAL EXAM"><U>FINAL EXAM</U></A>   |   <A HREF="id64.htm" TARGET="_top" TITLE="Print Version"><U>Print Version</U></A></div> <bR> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="121d2c00dkelyh.gif"> <bR> <div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U><IMG SRC="130af630.gif" border=0 width="175" height="99" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></U></A></div> <bR> <div> <I><B> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="83" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U>Instructor</U></A></div> </NOBR></tD> </tR> </TABLE></B></I></div> <div> Copyright <FONT SIZE="2" COLOR="#000080" FACE="Arial" >©2004</FONT> Wall Street Instructors, Inc. All rights reserved. No portion of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means electronic, mechanical, photocopying, recording or otherwise without prior written permission of Wall Street Instructors, Inc.</div> <bR> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I>GLOSSARY</I></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="10" WIDTH="620" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 96 WIDTH="137"><div> <B>Applicable federal rates (AFR)</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> The IRS publishes base interest rates each month that are known as the applicable federal rates (AFR). They are used for various purposes under the Code, including being used in imputed interest and original issue discount rules. The AFR is normally available during the third or fourth week of the month. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 58 WIDTH="137"><div> <B>Collateral assignment split dollar plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A collateral assignment split dollar plan is one in which the policy is owned by the insured who assigns it to the employer as security for its interest in the policy. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 76 WIDTH="137"><div> <B>Deferred compensation plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A deferred compensation plan is a nonqualified plan under which additional retirement benefits are provided to selected executives.  The plan may be a "true" deferred compensation plan or a salary continuation plan. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 76 WIDTH="137"><div> <B>Defined benefit qualified plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A defined <I>benefit</I> qualified plan is any qualified retirement plan that is not a defined contribution plan.  The plan is couched in terms of the benefit to be provided the participants rather than the contribution to be made. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 58 WIDTH="137"><div> <B>Defined contribution qualified plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A defined contribution qualified plan is a qualified plan characterized by <I>individual accounts</I>.  It is couched in terms of the contributions to be made for the benefit of the participants. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 76 WIDTH="137"><div> <B>Endorsement split dollar</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> An endorsement split dollar plan is one in which the policy is owned by the employer who endorses to the insured the right to name a beneficiary for the death benefits in excess of the employer's interest. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 134 WIDTH="137"><div> <B>Executive bonus plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> Under an insured executive bonus plan, an employer agrees to pay some or all of the premiums on a life insurance policy owned by an executive.  The employer's premium payments are deductible to the employer as compensation paid to an employee.  As a result, the premium payments are included in the executive's W-2 statement, and the executive must include the premiums in his or her income for tax purposes. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 115 WIDTH="137"><div> <B>Fifth dividend option</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> The fifth dividend option is a dividend option in a participating life insurance policy under which an amount of one-year term life insurance equal to the policy's cash value is purchased each year by application of the dividend.  Any dividend declared in excess of the amount required to purchase the term insurance can be applied under one of the other dividend options.   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 57 WIDTH="137"><div> <B>Funded plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A funded plan is a deferred compensation plan to which specific assets are allocated to ensure that the promised benefit will be paid. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 76 ><NOBR><div> <B>Golden handcuffs</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> Golden handcuffs is a term that is sometimes used to refer to a salary continuation plan because of its ability to motivate participating executives to remain with his or her current organization. </div> </tD> </tR> </TABLE></div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="10" WIDTH="620" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 89 WIDTH="137"><div> <B>Group carve-out plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A group carve out plan is an arrangement under which an employer replaces the executives' group life insurance <I>in excess of $50,000</I> with individual universal life insurance policies.  These individual universal life insurance policies are owned by the respective executives. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 160 ><NOBR><div> <B>Informal funding</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> <I>Informal funding</I> means that an asset has been purchased by the employer to help it to meet its obligation to provide the promised benefits under a deferred compensation plan.  That informal funding may be provided through the purchase of mutual funds, the creation of a sinking fund, the purchase of life insurance or by acquiring any other asset that will help enable the employer to provide the benefits that were promised.  Regardless of the informal funding vehicle, for tax purposes, an informally funded plan is considered unfunded because the identified asset is attachable by the employer's creditors. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 71 ><NOBR><div> <B>Nonqualified plan</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> Nonqualified plans are benefit plans used by businesses to provide benefits on a selective basis to chosen employees.  The major types of nonqualified plans are split dollar, deferred compensation, executive bonus and group carve out plans.   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 107 WIDTH="137"><div> <B>P.S.58 rates</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> The P.S.58 rate table is an age-based table of rates per thousand dollars of one year term insurance promulgated by the federal government that may be used as a measure of the value of insurance protection provided under split dollar plans, qualified retirement plans and tax-sheltered annuities.  It has been largely replaced by the Table 2001 rate table. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 53 ><NOBR><div> <B>Public corporation</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> A <I>public</I> corporation is a corporation whose shares of stock are readily available to the general public and are bought and sold in the open market.   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 53 WIDTH="137"><div> <B>Qualified plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A qualified plan is one that meets certain requirements and, thereby, qualifies for a current income tax deduction for contributions made to it.   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 160 WIDTH="137"><div> <B>Rabbi trust</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A rabbi trust is an irrevocable trust used to accumulate assets to support deferred compensation arrangements and designed to overcome the concern that a change in company management could place the promised deferred compensation plan benefits in jeopardy.  A rabbi trust, however, contains a provision that the trust assets would always be available to the employer's general creditors in the event of bankruptcy.  As a result of that provision, the IRS has held that, in the case of a deferred compensation plan whose benefits are secured by a rabbi trust, the participant would have no current taxable income. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 71 WIDTH="137"><div> <B>S corporation</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> An S corporation is a corporation that meets certain requirements and elects to have its income taxed to its stockholders rather than to the corporation.  It is a domestic corporation that elects to be treated like a partnership for tax purposes. </div> </tD> </tR> </TABLE></div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="10" WIDTH="620" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 71 WIDTH="137"><div> <B>Salary continuation plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A salary continuation plan in a type of deferred compensation plan that does not require that the executive defer any compensation at all.  Instead, the employer agrees to fund the benefit entirely.  This plan is often known as a SERP-Selective Executive Retirement Plan. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 107 ><NOBR><div> <B>Section 162 (IRC)</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> Section 162 of the Internal Revenue Code is the section that states that an employer may deduct certain expenses-including salary and other compensation-that are ordinary and necessary business expenses.  It is in reference to this Code section that certain nonqualified plans, known as executive bonus plans, are sometimes referred to as Section 162 Plans.   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 71 WIDTH="137"><div> <B>Secular trust</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A secular trust is a trust used to formally fund and secure nonqualified deferred compensation.  Since funds placed in a secular trust are not subject to the claims of the employer's creditors, they are generally subject to current taxation. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 89 ><NOBR><div> <B>Split dollar plan</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> A split dollar plan, when used in an employee-employer situation, is an arrangement under which a permanent life insurance policy is purchased on the life of a key executive, and the premiums and death benefits are split between the employer and the executive (or a third party).   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 53 ><NOBR><div> <B>Split dollar rollout</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> The term "rollout" refers to the termination of a split dollar agreement, at which time the policy's cash values are <I>rolled out</I> to repay the employer's interest in the policy. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 71 WIDTH="137"><div> <B>Table I rates</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> The Table I rate table is an age-based table of rates per thousand dollars of one year term insurance promulgated by the federal government for use as a measure of the value of excess group term life insurance. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 89 ><NOBR><div> <B>Table 2001 rates</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> The Table 2001 rate table is an age-based table of rates per thousand dollars of one year term insurance promulgated by the federal government that may be used as a measure of the value of insurance protection provided under split dollar plans, qualified retirement plans and tax-sheltered annuities.  It replaced the P.S.58 rate table. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 36 WIDTH="137"><div> <B>Traditional split dollar plan</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> In a traditional split dollar plan, the part of the policy premium paid by the employer is equal to the increase in policy cash value each year. </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 89 WIDTH="137"><div> <B>True deferred compensation</B></div> </tD> <tD VALIGN=TOP WIDTH="449"><div> A true deferred compensation plan is one that is consistent with the common understanding of the term: the participating executive agrees to delay the receipt of a portion of the compensation to which he or she is entitled.  Typically compensation is delayed until the executive retires.   </div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 71 ><NOBR><div> <B>Unfunded plan</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="449"><div> An unfunded plan is a deferred compensation plan whose benefits are supported by the general assets of the employer, rather than by a specific asset that has been segregated from those general assets.  As such, these assets are attachable by the employer's creditors.  </div> </tD> </tR> </TABLE></div> <bR> <bR> <bR> </td> </tr></table></body>