Basic Definitions

A defined contribution plan in which participants may instruct their employer to deduct a portion of their pay which is then contributed to the plan in their name. Such contributions are often referred to as deferrals, in reference to the fact that most taxes on the contributed compensation are deferred until the money is distributed from the 401(k) plan.
The Actual Contribution Percentage Test applies to any plan that accepts matching or employee after-tax contributions and is used to determine if those contributions were discriminatory in the favor of Highly Compensated Employees. The ACP test must be satisfied in order for a plan to remain qualified and eligible for favorable tax status.
An actuary is one who calculates insurance and annuity premiums, reserves, and dividends. Defined benefit plans are required to retain the services of an enrolled actuary. An Enrolled Actuary is an actuary who has been licensed under the Joint Board of the Department of Treasury & Department of Labor to perform a variety of actuarial tasks that are required for pension plans in the United States.
The Actual Deferral Percentage Test compares the deferral rates of Highly Compensated Employees and non-Highly Compensated Employees to determine if such contributions were discriminatory in favor of the Highly Compensated Employees. The ADP test must be satisfied in order for a plan to remain qualified and eligible for favorable tax status.
Defined Benefit (DB) Plan
A defined benefit plan promises to pay a specific benefit at retirement age. The plan’s sponsor assumes the investment risk and is obligated to pay the accrued benefits regardless of any gains or losses in the plan’s accumulated trust fund.
Defined Contribution (DC) Plan
A defined contribution plan allocates contributions to a participant’s account in the manner defined in the plan document. The participant’s benefit from the plan is the accumulated value of their account at retirement or termination of employment.
The Employee Retirement Income Security Act of 1974 was enacted to ensure that employees receive the pension and other benefits promised by their employers. ERISA is tied to provisions of the Internal Revenue Code. The provisions of ERISA and the IRC are intended to ensure that tax-favored pension plans do not favor Highly Compensated Employees over rank-and-file employees in the way benefits are provided.
Form 5500
This form, and its applicable schedules & attachments, is filed annually with the Department of Labor. Its purpose is to ensure the plan is operated in compliance with ERISA and the Internal Revenue Code and to provide the participants greater awareness of their rights.
Highly Compensated Employee
Generally, a highly compensated employee is defined as follows:

  •  Any employee who owns (directly or indirectly) more than 5% of the business.
  • Any employee whose annual compensation exceeds $125,000 in 2019 or $130,000 in 2020.

Integration is the practice of considering the anticipated Social Security Benefits of participants when determining benefits from or contributions to the plan.

Key Employee

A key employee is any employee who fits into the following classifications:

  • An officer whose annual compensation exceeds $185,000 (as indexed for 2020).
    • An employee who owns (directly or indirectly) more than 5% of the business
    • An employee who owns (directly or indirectly) more than 1% of the business and whose annual compensation exceeds $150,000.

The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of defined benefit pension plans, provide timely and uninterrupted payment of pension benefits to participants and beneficiaries in plans covered by PBGC, and keep pension insurance premiums at the lowest level necessary to carry out the Corporation’s objectives.


Acronym for Portable Document Format, a file format developed by Adobe Systems. PDF files preserve formatting information from a variety of desktop publishing applications, making it possible to present them so they appear on the recipient’s monitor or printer as they were intended. To view a file in PDF format, you need Adobe Reader, a free application distributed by Adobe Systems.

Plan Administrator

As designated by the plan document, the Plan Administrator is the individual or entity responsible for managing the day-to-day affairs of the plan.

Plan Document

The written compilation of the benefits a plan offers and the rules that govern them.

Plan Sponsor

This is the entity (employer) that establishes the plan.

Profit Sharing Plan

A profit sharing plan is a type of defined contribution plan. The allocation method must be laid out in the plan document, but the amount of the contribution, if any, can be discretionary.

Top Heavy Plan

A plan is generally a top heavy plan when more than 60% of the plan assets are attributable to key employees. If the plan becomes top heavy in any plan year, non-key employees will be entitled to certain “top heavy minimum benefits,” and other special rules will apply.


A Third Party Administrator is an entity or individual hired to provide purely ministerial services for the plan. TPAs aid in the administration of the plan, but the liability remains solely with the plan’s sponsor and trustees.


The entity, person, or persons named in the plan document, who shall be responsible for the prudent management of the plan’s assets.

Vesting Schedule
In a retirement plan, plan sponsors may require a certain number of years of service in order to earn 100% of the retirement benefits that have been credited to the participant. The participant earns (vests) a certain percentage of his benefit each year based on the vesting schedule. The most common vesting schedule is the 6-year-graded. Under this schedule a participant earns 20% of his benefit after 2 years of service and 20% each year thereafter until 100% has been reached.

Note: These definitions are in no way intended to be a complete explanation of the complex rules that govern Qualified Retirement Plans. They are provided solely to offer a basic understanding of the concepts involved.