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Glossary of Terms

401(k)

401(k) Plans are defined contribution plans funded primarily by the pre-tax contributions of employees. These plans, named for the section of the Internal Revenue Code that establishes this type of retirement plan, allow employees to save part of their salaries and defer paying taxes until they receive the money. Employers can match the contributions, which are also tax deferred.

Automatic Enrollment 401(k)

In Automatic Enrollment 401(k) Plans, employees are enrolled unless they opt out and contributions are deducted from their paychecks. Automatic Enrollment 401(k) Plans can increase plan participation among rank-and-file employees and make it more likely the plan will pass the test ordinarily required under a traditional 401(k) plan. In addition, for certain default investment options provided under the plan, there is relief from liability for the investment results.

Contribution

A contribution is an amount an employer pays into a plan for all those participating in the plan, or an amount an employee pays into a plan for his or her benefit.

Defined Benefit

A Defined Benefit Plan is designed to provide each participant with a fixed income at retirement.

Payroll Deduction Individual Retirement Account (IRA)

An employer can set up a payroll deduction IRA program with a bank, insurance company or other financial institution, and then the employees choose whether and how much they want deducted from their paychecks and deposited into the IRA. Employees may also have a choice of investments depending on the IRA provider.

Profit Sharing

Profit Sharing Plans depend on contributions from employers, who agree to share a percentage of profits with employees. These plans may permit contributions from eligible employees as well.

Safe Harbor 401(k)

Safe Harbor 401(k) Plans are similar to traditional 401(k) Plans and are defined contribution plans funded by the pre-tax contributions of employees. In the Safe Harbor 401(k) plans, however, employers are required to make a minimum amount of contributions, but are not required to undergo nondiscrimination tests required under traditional 401(k) tests.

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE)

SIMPLE allows employers with no more than 100 employees to sponsor a retirement plan. Employees who are expected to receive at least $5,000 (and who did so in previous 2 years) are eligible to contribute through a deduction from their paychecks. They can receive an employer matching contribution of up to 3 percent of their pay. Employers may reduce that amount if business conditions vary from year to year. SIMPLE plans require few administrative burdens since the bank or financial institution receiving the funds does most of the paperwork.

Self-employed

An individual in business for himself or herself is self-employed. Sole proprietors and partners are self-employed. Self-employment can include part-time work.

Simplified Employee Pension (SEP)

A SEP allows deductible contributions without getting involved in more complex retirement plans. Under this type of retirement plan, an employer makes contributions on behalf of its employees to an individual retirement arrangement called a SEP-IRA.

Vested

An individual becomes vested in a retirement plan when he or she has the years of service required to receive a pension. Vesting means an individual has the right to collect a pension at a specific age, even if he or she does not stay with the company or organization for their entire working career.

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