401(k) Glossary

Here are many of the industry terms you're likely to come across when a 401(k) is being discussed.
If you can't find it here, you may want to refer to this even more expansive list.
 

#  A  B  C  D  E  F  G  H  I  J  K  L  M  N  O  P  Q  R  S  T  U  V

• 3(16) - 3(16) refers to a specific section of the ERISA code in which it defines different types of fiduciaries. A 3(16) fiduciary has responsibility for the day-to-day administration of the 401(k), including sending notices as required by ERISA, administering loans, ensuring that the rules of the plan are administered, and maintaining documentation of compliance.

• 3(21) - A type of fiduciary. Refers to a specific section of the ERISA code in which it defines different types of fiduciaries. A 3(21) is an investment advisor who can be hired to help select investments for the 401(k). They are a co-fiduciary, meaning that they do not have full authority. The 3(21) makes recommendations but the sponsor still makes the final decision. Kind of like - buy low, sell high. Therefore, the employer still bears liability for the investment decisions.

• 3(38) - A type of fiduciary. Refers to a specific section of the ERISA code in which it defines different types of fiduciaries. A 3(38) is an investment advisor who can be hired to make all the investment related decisions for the plan (which funds to put in the plan, etc.). Because they have full discretion, they take on all the liability and the plan sponsor is relieved of much of its liability. The sponsor is responsible for prudently selecting and monitoring the 3(38), but the 3(38) bears all the investment advisory risk.

• 401(k) Plan - A defined contribution plan that permits employees to have a portion of their salary deducted from their paycheck and contributed to an account. Federal (and sometimes state) taxes on the employee contributions and investment earnings are deferred until the participant receives a distribution from the plan (typically at retirement). Employers may also make contributions to a participant's account.

• 404(c) - Optional regulation on plan sponsor to provide certain information and fund choices so plan participants can make informed decisions about their retirement plan investments.

• Annual Contribution Percentage (ACP) test - A test to determine if an employer's contributions made on behalf of employees discriminate in favor of highly compensated employees.

• Actual Deferral Percentage (ADP) test - A test to determine if elective deferrals made on behalf of employees discriminate in favor of highly compensated employees.

•  Average Contribution Percentage - The average contribution percentage is the average of the contribution ratios for a group of employees, either highly compensated employees or non-highly compensated employees. An employee's contribution ratio is the sum of an employer's contributions made for the employee for a plan year divided by the employee's compensation for the year.
• Average Deferral Percentage - The average deferral percentage is the average of deferral ratios for a group of employees, either highly compensated employees or non-highly compensated employees. An employee's deferral ratio is the elective deferrals made for the employee for a plan year divided by the employee's compensation for the year. 

• Beneficiary - A person, persons or trust designated to receive the plan benefits of a participant in the event of the participant's death.
• Blackout Period - When a plan sponsor decides to switch from one plan vendor to another, there is typically a period during which participants are not permitted to make changes in their investment selections. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts. Blackout periods can last up to 60 days.

• Compensation - Pay received by employees for personal services. Types of pay includible for compensation the Annual Employee Census are described in your plan document. Generally, compensation includes income reported on a W-2, K-1, or Schedule C. Each plan may have several different definitions of compensation. It is critical to know how your plan document defines compensation.
• Contribution - The amount designated to deposit into one's 401(k) each month. 
• Conversion - The term used for when an employer is moving their plan from one investment platform to another. For example, moving from Morgan Stanley to Empower. 
• Corrective Distribution - A distribution of funds from the plan to correct a nondiscrimination test or to correct a contribution in excess of a statutory limit. 
• Cross-tested / New Comparability Plan - A type of defined contribution plan that allows profit sharing contributions to be allocated to different employee groups. The general rule is that the owners must be older than the staff, in order to maximize the full benefits of cross testing.

• Defined Contribution Plan - A type of retirement plan such as a 401(k), 403(b), ESOP or Profit Sharing Plan. 

• Discrimination Testing - All tax qualified retirement plans must be administered in compliance with numerous regulations to comply with IRS guidelines. In addition, every tax qualified retirement plan, such as a 401(k), must pass a number of compliance tests each year. These tests include the ADP test, ACP test, and Top-heavy test. Discrimination testing is comprised of each of these tests.

• Distribution - Money taken out of a 401(k). Generally, distributions of elective deferrals can't be made until one of the following occurs:

  • Death, become disabled, or otherwise have a severance from employment

  • The plan terminates and no successor defined contribution plan is established or maintained by the employer

  • You reach age 59 1/2 or incur a financial hardship

• Elective Deferral - An amount elected by a participant to be contributed to a plan. Elective deferrals can be either pre-tax elective deferrals or designated Roth contributions, if your plan allows for Roth contributions.
• Employee Plans Compliance Resolution System (EPCRS) - The program used by the IRS to correct plan errors. The program consists of the voluntary correction program, the self-correction program, and audit CAP.
• Employee Stock Ownership Plan (ESOP) - A defined contribution plan comprised either of a stock bonus plan or of a combined stock bonus and money purchase pension plan which is designed to invest primarily in employer stock.
• ERISA - In 1974, the Employee Retirement Income Security Act (ERISA) was enacted to regulate most types of employee benefit plans such as 401(k)s. 
• ERISA Form 5500 - The tax filing form that defined contribution plans must file annually. It is generally prepared by your Third Party Administrator. Inde prepares a signature-ready Form 5500 for each of its clients after completing their Annual Compliance Review.
• Excise Tax - An excise tax is a 10% early withdrawal tax assessed by the IRS. 

• Fidelity Bond - An ERISA requirement that every fiduciary of an employee benefit plan, and every person who handles plan funds be bonded. These bonds cover the plan from loss of assets due to fraud or dishonesty. The bond is required to insure 10% of assets, at a minimum.
• Fiduciary - The individual(s) that is exercising discretion or control over the plan. Essentially, someone who is acting on behalf of the plan, its participants, and beneficiaries. See more from the Department of Labor here. 

• Hardship Distribution - An in-service distribution from the plan which is made because the participant has suffered severe financial difficulty or an extraordinary event as defined by the plan document. In order to make hardship distributions from your plan, it must provide for such distributions.
• Highly Compensated Employees (HCE) - A HCE in 2016 is someone:
  • Who earned $120,00 in 2015 or $120,000 in 2016 and is in the top 20% of employees when ranked by compensation
    -or-
  • Who owns 5% of the company in the current or previous year (family stock attribution rules apply, which treat an individual as owning stock owned by their spouse, children, grandchildren or parents). 

• In-service Distribution - A distribution that is paid to a participant while he or she is still employed. 
• Involuntary Cash-out - An involuntary distribution of a terminated participant's vested account balance of $5,000 or less. Cash-out amounts between $1,000 and $5,000 must be rolled over to a Traditional IRA. Monitoring your plan for involuntary cash-out opportunities is an important component of Inde's comprehensive Annual Compliance Review.

Key Employee - A Key Employee is generally either of the following:

• 5% Owner: A 5% owner of the company in the current or previous year (family stock attribution rules apply, which treat an individual as owning stock if it is owned by their spouse, children, grandchildren or parents)
  -or-
• A 1% owner of the company in the current or previous year whose annual pay was more than $150,000 (family stock attribution rules apply, which treat an individual as owning stock if it is owned by their spouse, children, grandchildren or parents)
  -or-
• An officer of the company whose annual pay was more than $170,000

• Leased Employee - An individual who is not a common-law employee of the business for which he or she performs services. A contractor hired through a temporary staffing agency would generally qualify as leased employee.
• Loan - Some plans allow participants to borrow money from their 401(k), though not all do because of the cost associated with administering them. A participant is allowed to take a loan of 50% of their vested balance, up to $50,000.

• Matching - Matching describes when an employer decides to contribute to an employee's account, if the employee contributes. For example, an employer will contribute 3% to an employee's account, but only if the employee also contributes 3%. 
• Minimum Contribution - A contribution required to be made to a plan in any year in which it is determined to be top-heavy.
• Multiemployer Plan - A plan that (1) more than one employer is required to contribute to, (2) is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and (3) that satisfies other requirements imposed by the Secretary of Labor.

• Non-elective Contribution - An employer contribution to a 401(k) that is neither an elective deferral nor a matching contribution. For example, a discretionary profit-sharing contribution, is a non-elective contribution.
• Non-highly Compensated Employee (NHCE) - An employee who is not a highly compensated employee.
• Non-key Employee - An employee who is not a key employee.
• Nonresident Alien - An employee who is not a citizen of the United States and has not met either the green card test or the residency test under Internal Revenue Code section 7701(b); and who receives no U.S. source income from the employer.

• Participant Directed Account - A type of 401(k) investment account that allows plan participants to select their own investment options.
• Plan Administrator - The plan administrator is generally  the employer sponsoring the retirement plan. This term is often confused with Third Party Administrator.
• Plan Trustee - The person who has exclusive authority and discretion to manage and control the assets of the plan; named as such either in the trust document or appointed to the position.
• Plan Year - The calendar or fiscal year for which plan records are maintained. Generally a plan year coincides with a company's fiscal year, but it may differ. 
• Profit Sharing Plan - A type of retirement plan that is solely funded by employer contributions. Profit sharing plans allow employers to choose annually whether or not they want to make a contribution to the pension plan. 

• Qualified Domestic Relations Order (QDRO) - A judgement, decree or order that creates or recognizes an alternate payee's (such as a former spouse, child, etc.) right to receive all or a portion of a participant's 401(k) account.
• Qualified Matching Contribution - Matching contributions that are fully vested when made to the plan and that are subject to the same distribution restrictions as elective deferrals (except for hardship). 
• Qualified Nonelective Contribution - Nonelective contributions that are fully vested when made to the plan and that are subject to the same distribution restrictions as elective deferrals (except for hardship). 

• Rollover - The term used for when an employee moves their 401(k). For example, from their old employer's plan to their new employer's plan.
• ROTH 401(k) - A 401(k) feature that allows employees to make contributions on an after-tax basis. Qualified withdrawals are generally tax free if made after 5 years and after attaining age 59 1/2. 

• Safe Harbor 401(k) - A type of defined contribution plan that exempts the employer from non-discrimination testing. Typically, it requires a 4% company match for every participant or a 3% nonelective contribution for every participant. Employer Safe Harbor contributions are 100% vested from day one. 
• Safe Harbor Nonelective Contribution - A type of Safe Harbor 401(k) plan contribution. It is a qualified nonelective contribution equal to 3% of a participant's compensation. 
• Self-correction Program - One of the programs under the Employee Plans Compliance Resolution System that allows plans to correct insignificant errors without approval from the IRS. 
• Summary Plan Description (SPD) - A Summary Plan Description (SPD) is a plain language version of the plan terms and must be distributed to each plan participant and to each beneficiary receiving benefits under the plan.

• Tax-deferred - A delayed payment of one's taxes. A participant doesn't pay taxes on their traditional 401(k) contributions, instead the participant is taxed when they make withdrawals.
• Termination - Cessation of the plan and distribution of its assets to participants. 
• Third-party Administrator - A company hired by a plan or its fiduciaries to aid in  performing management and/or recordkeeping functions on behalf of the plan. Inde is a third-party administrator. 
• Tiered Matching Contributions - A way for employers to match. With tiered matching, employers match some percentage of employee contributions up to a dollar or percentage amount, then match a lower percentage up to a second dollar amount or percentage.
• Top-heavy Test - A retirement plan that primarily benefits "key employees" is called a "top-heavy plan." A plan is generally a "Top-heavy plan" when more than 60% of the plan assets are attributable to key employees. 
• Trustee - All money that is contributed to the Plan is held in a trust fund. The trustees are responsible for the safekeeping of the trust fund and must hold and invest plan assets in a prudent manner and in the best interest of the participants and beneficiaries.

• Vesting - The schedule and length of time an employee must meet to keep the employer discretionary contributions (i.e., profit sharing contributions and employer matching contributions). An employee usually earns a year of vested service after completing 1,000 hours of service for the employer. However, each plan can have a unique vesting schedule.
• Voluntary Correction Program - A program under the Employee Plans Compliance Resolution System that allows plans to submit an application and fee to the Internal Revenue Service in order in order to correct a plan error. This program is not available to plans under examination.