Terms & Definitions
Key Terms Explained.
- 401(k) Plan
- A 401(k) is a defined-contribution, tax-advantaged retirement savings plan that is sponsored by one's employer.
- 403(b) Plan
- A 403(b) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations.
- ADP Test
- The Actual Deferral Percentage (ADP) test is an annual non-discrimination test performed on the employee salary deferral (pre-tax and Roth) contributions in a 401(k) plan.
- The ADP test compares the average rate of salary deferrals of the Highly Compensated Employee (HCE) group versus the average rate of salary deferrals of the Non-Highly Compensated Employee (NHCE) group.
- ACP Test
- The Actual Contribution Percentage (ACP) test is an annual non-discrimination test performed on the employer matching contributions and/or employee voluntary after-tax contributions (non-Roth employee salary reduction) in 401(k) and 403(b) plans.
- The ACP test compares the average rate of employer matching and/or employee voluntary after-tax (non-Roth employee salary reduction) contributions of the HCEs versus that of the NHCEs.
- Beneficiary
- The individual designated by the participant to receive any benefits due to the participant in the event of the participant's death.
- Beneficiary Designation Form
- A document completed by plan participants to specify who will receive their account balance in the event of their death.
- Cash Balance Plan
- A cash balance plan is a type of defined benefit pension plan that promises employees a benefit based on a stated account balance.
- Catch-Up Contributions
- Additional contributions allowed for participants aged 50 or older, enabling them to save more than the standard deferral limits.
- Compensation
- Compensation for the plan year is defined as compensation while a participant in the plan. For new entrants, compensation is generally defined as earnings from entry into the plan through the plan year end. This compensation is used for allocation and testing purposes and thus important to the overall balance of the plan.
- Cross Tested Profit Sharing Plan
- A Cross tested plan is a defined contribution plan that uses a certain testing method to show that the plan does not discriminate in favor of highly compensated employees (HCEs).
- Deferral Contributions
- The portion of an employee's salary that is contributed to a retirement plan on a pre-tax or Roth basis.
- Defined Benefit Plan
- A defined benefit plan is a retirement plan that promises a specific monthly benefit to employees when they retire. The benefit is often based on factors like the employee's salary, age and years of service.
- Department of Labor (DOL)
- The U.S. government agency responsible for regulating employment matters, including retirement plans, ensuring they comply with federal laws.
- Discretionary Profit-Sharing Contributions
- Employer contributions made voluntarily based on the employer's decision and allocated according to the plan's rules.
- Elective Deferral
- Another term for "elective contribution" or "salary deferral".
- Eligibility
- Requirements set by the retirement plan for employees to be able to participate; may include a minimum age requirement and a required length of service.
- Employee Deferrals
- Salary contributions employees make to their retirement plan accounts, either pre-tax or Roth, subject to IRS annual limits.
- Employer Contributions
- Contributions made by employers to employees' retirement accounts. These may include matching contributions, discretionary profit-sharing, or Safe Harbor contributions.
- Enhanced Catch-Up Contributions
- An additional contribution option for employees aged 50 and older to exceed standard limits. Starting in 2026, high-income earners must make these contributions on a Roth basis due to SECURE 2.0 Act changes.
- Entry date
- An entry date is the date a participant can enter the plan after satisfying the age and service requirements described in the adoption agreement.
- ERISA
- Employee Retirement Income Security Act of 1974 is a US federal law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans.
- Retirement Plans covered under ERISA are often referred to as qualified plans. In order to qualify under ERISA, plan sponsors must meet a number of federal requirements regarding fund, vesting, participation, and the accrual of benefits.
- Fidelity Bond
- An insurance policy required for most retirement plans to protect against fraud or dishonesty by individuals managing the plan.
- Fiduciary
- A fiduciary is a person or organization that acts on behalf of a person or persons, putting their interest above their own. In retirement plans, fiduciaries must keep the plan operating in accordance with IRS and DOL rules and regulations and always act in the best interest of the participants and beneficiaries.
- Form 5500
- An annual IRS and DOL filing detailing the financial condition, investments, and operations of a retirement plan.
- Highly Compensated Employee (HCE)
- An employee is considered an HCE due to either ownership or compensation. For compensation, an employee who earned more than $155,000 in 2024 (note the amount is subject to change each year) is considered to be an HCE. An employee who is more than a 5% owner in the current or prior plan year is considered to be an HCE. Due to family attribution rules, the spouse, children, parents, and grandparents of a more than 5% owner are attributed with ownership and are considered to be HCEs.
- For a plan to be entitled to favorable tax treatment, a qualified retirement plan cannot discriminate in favor of highly compensated employees.
- Long-Term, Part-Time Employee
- An employee who works more than 500 hours in three consecutive years. This new category of eligibility was added with the SECURE Act in 2019 and went into effect in January 2021. The first employees to become participants under this rule entered the plan on January 1, 2024. Secure 2.0 changed this to 500 hours in each of two consecutive years starting in 2025.
- Match
- An employer contribution dependent on an employee 401(k) salary deferral election. The employer may offer a match to increase participation. An example of a formula would be an employer match of $0.25 per $1 deferred up to 4% of pay. The match may be discretionary and subject to a vesting schedule unless it is also used to satisfy Safe Harbor.
- New Comparability Profit Sharing Plan
- Qualified defined contribution plans that allow employers to customize contributions for different groups of employees or for individual employees. Unlike traditional profit sharing plans, these plans can have a tiered contribution structure, enabling employers to allocate contributions in a way that can favor certain groups of employees—typically older or higher paid employees—while still offering other participants a healthy employer contribution.
- Partial Plan Termination
- Occurs when a significant percentage of plan participants are involuntarily terminated, triggering full vesting of their accounts.
- Participant
- An individual who has met plan eligibility requirements and entered into the plan. An employee becomes a participant upon plan entry.
- Participant Notices
- Documents provided to plan participants, outlining details about eligibility, benefits, investments, fees, and changes to the plan.
- Plan Administrator
- The individual responsible for running the plan. The Plan Administrator is typically an employee of the organization like the HR manager. If a plan administrator is not designated, the plan administrator is the plan sponsor.
- Plan Consultant
- Your Plan Consultant (PC) is the head of your team here at The TPA Experts. Your PC will be assigned during the Onboarding process. As you work with us, if you have any questions about your plan you should reach out to your PC.
- Plan Documents
- The legal documents governing a retirement plan, including amendments, Summary Plan Descriptions, and determination or opinion letters.
- Plan Sponsor
- A Plan Sponsor is a designated party—typically a company or employer—that sets up a retirement plan for the benefit of the organization's employees.
- Pooled Investment Accounts
- The pooled investment account allows investors to be treated as a single account holder, enabling them to buy more shares collectively than they could individually, and often for better—discounted—prices. Mutual funds are among the best-known examples of pooled funds.
- Profit Sharing Plan
- A profit-sharing plan (PSP) is a retirement plan that allows employers to share a portion of their company's profits with their employees.
- Qualified Default Investment Alternatives (QDIA)
- Investment options automatically used for participants who do not make their own elections. These are designed for long-term retirement savings.
- Required Minimum Distribution (RMDs)
- The minimum amount participants must withdraw annually from retirement accounts beginning at age 73 (75 starting in 2033). RMDs are designed to ensure that investments in retirement accounts don't grow tax-deferred indefinitely.
- For the most up-to-date information on Required Minimum Distributions (RMDs), please visit the IRS RMD FAQs page.
- Roth
- Roth contributions are elective deferrals made on an after-tax basis within a 401(k) plan. Since these contributions are elective deferrals, they are subject to the 402(g) limit the same as elective deferrals made on a pre-tax basis. If certain withdrawal restrictions are met, the associated earnings are not subject to income taxation at the time of distribution.
- Salary Deferral
- A portion of an individual's salary contributed to a retirement plan (e.g., 401(k) plan) that is "deferred" and will be received at a later date. Also known as an "elective contribution" or "elective deferral".
- Safe Harbor
- An employer may choose to make a special contribution to the employees to pass the ADP and top-heavy tests. This contribution must meet certain requirements, such as 100% vesting and including eligible employees who terminate before the end of the year. New plans must be in place for at least 90 days. These options are:
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- 3% contribution to all eligible non-highly compensated employees (may also include highly compensated). 3% may do "double duty" counting as a basis for new comparability plans based on job class. Final notice due 30 days prior to plan year-end.
- Match non-highly compensated employees $1 for $1 up to 3%, plus $0.50 on the $1.00 from 3% to 5% (may increase match to $1 for $1 up to 6% of pay and include highly compensated). Final notice due 30 days prior to plan year beginning, except for new plans.
- Automatic Enrollment provision at 6% of compensation over 4 years and a $1 for $1 match up to 3.5% with vesting after 2 years. Final notice due 30 days prior to plan year beginning.
- Salary Deferral
- A portion of an individual's salary contributed to a retirement plan (for example a 401(k) plan) that is "deferred" and will be received at a later date. Also known as an "elective contribution" or an "elective deferral."
- SECURE ACT and SECURE 2.0
- The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, which originally passed the House in May 2019, was approved by the Senate a few months later, as part of an end-of-year appropriations act and accompanying tax measure. It was signed into law on Dec. 20, 2019. The bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
- The SECURE 2.0 Act was enacted in 2022 as an update to the 2019 SECURE Act by expanding the options for retirement savings. One of the most important changes of the new law is raising the age when retirees must start taking distributions from certain retirement accounts. It also reduces the penalty for untaken distributions and makes it easier to withdraw savings in certain circumstances. See our Secure 2.0 Info Sheet for more information.
- Summary Plan Description (SPD)
- A document updating participants about modifications to the Summary Plan Description due to plan amendment, either by plan sponsor or regulatory changes.
- Summary of Material Modifications (SMM)
- A document describing significant changes to a retirement plan, updating participants about modifications to the Summary Plan Description.
- Universal Availability Notice
- A notice required for 403(b) plans to ensure that all eligible employees are given the opportunity to participate.
- Vesting
- The process by which employees gain ownership of employer contributions in their retirement accounts, based on years of service or other plan rules.