Retirement plan administration comes with its own vocabulary. Whether you’re setting up your first 401(k) or reviewing your annual compliance testing results, this glossary covers the terms you’ll encounter most often — explained in plain language.
Here’s every term a plan sponsor, business owner, or advisor is likely to run into.
A
ADP Test (Actual Deferral Percentage Test)
An annual nondiscrimination test that compares how much highly compensated employees (HCEs) defer to their 401(k) versus non-highly compensated employees (NHCEs). If HCEs defer too much relative to NHCEs, the plan fails and corrective action is required. Safe Harbor plans are exempt from ADP testing.
ACP Test (Actual Contribution Percentage Test)
Similar to the ADP test, but measures employer matching contributions and after-tax employee contributions instead of elective deferrals. Plans that fail must refund excess contributions or make additional employer contributions.
Annual Additions Limit (Section 415 Limit)
The maximum total amount that can be contributed to a participant’s account in a single year, including employee deferrals, employer matching, and profit-sharing. For 2024, this limit is $72,000 ($80,000 with catch-up contributions for those 50+).
Automatic Enrollment
A plan feature that automatically enrolls eligible employees at a default deferral rate unless they opt out. Automatic enrollment typically increases participation rates significantly. See also: EACA, QACA.
B
Blackout Period
A temporary period during which participants cannot make changes to their plan accounts — typically during a recordkeeper conversion or plan merger. Employers must provide advance notice (usually 30 days) before a blackout period begins.
Beneficiary
The person or entity designated to receive a participant’s retirement account balance upon their death. Plans should encourage participants to keep beneficiary designations current, especially after major life events.
C
Cash Balance Plan
A type of defined benefit plan where each participant has a hypothetical account balance that grows through employer contribution credits and interest credits. Often paired with a 401(k) to allow high-income business owners to defer $100K–$300K+ per year in tax-advantaged savings.
Catch-Up Contribution
Additional elective deferrals allowed for participants age 50 and older. For 2026, the catch-up limit is $8,000 on top of the standard $24,500 elective deferral limit. Participants age 60 – 63 may be eligible for a super catch-up contribution, if the plan document allows. For 2026, the super catch-up contribution limit is $11,250.
Compensation
The definition of pay used to calculate contributions and perform nondiscrimination testing. Plans can use different definitions (W-2 wages, Section 415 compensation, etc.), and the definition matters — it affects how much each participant can contribute and how testing results come out.
Corrective Distribution
A refund of excess contributions made when a plan fails nondiscrimination testing. Must be distributed by a specific deadline (usually March 15 of the following year) to avoid excise taxes.
Coverage Test (Section 410(b))
A test ensuring that the plan covers a sufficient percentage of non-highly compensated employees relative to highly compensated employees. Plans that fail coverage testing may need to expand eligibility.
D
Defined Benefit Plan
A retirement plan that promises a specific benefit at retirement, typically calculated as a formula based on salary and years of service. The employer bears the investment risk. Cash balance plans are a type of defined benefit plan.
Defined Contribution Plan
A retirement plan where contributions are defined but the ultimate benefit depends on investment performance. 401(k), 403(b), and profit-sharing plans are all defined contribution plans. The participant bears the investment risk.
Discretionary Match
An employer matching contribution that the employer chooses whether to make each year (as opposed to a Safe Harbor match, which is mandatory). Discretionary matches give the employer flexibility but don’t exempt the plan from nondiscrimination testing.
E
EACA (Eligible Automatic Contribution Arrangement)
An automatic enrollment feature that allows the plan to automatically refund excess contributions within 6 months of the plan year-end if testing fails, providing more time for corrections.
Elective Deferral
The portion of an employee’s salary they choose to contribute to their 401(k) on a pre-tax or Roth basis. For 2026, the elective deferral limit is $24,500 ($32,500 with catch-up for those 50+ years old and up to $35,750 with special super catch up for those 60 – 63 years old).
ERISA (Employee Retirement Income Security Act)
The federal law that governs most employer-sponsored retirement plans. ERISA sets minimum standards for participation, vesting, benefit accrual, and fiduciary responsibility. It also requires plans to provide participants with certain disclosures.
F
Fiduciary
A person or entity that exercises discretionary authority or control over plan management or assets. Fiduciaries must act solely in the interest of plan participants and are personally liable for breaches of their duty.
Form 5500
The annual return/report filed with the IRS and Department of Labor for most ERISA-covered retirement plans. Due by the last day of the 7th month after the plan year ends (July 31 for calendar-year plans), with a 2.5-month extension available.
Forfeiture
The non-vested portion of an employer contribution that a participant loses when they leave the company before becoming fully vested. Forfeitures can be used to reduce future employer contributions, pay plan expenses, or be reallocated to remaining participants.
H
Hardship Withdrawal
A distribution from a 401(k) plan made due to an immediate and heavy financial need. Subject to income tax and potentially a 10% early withdrawal penalty.
HCE (Highly Compensated Employee)
For nondiscrimination testing purposes, an employee who earned more than $160,000 in the prior year (2025 threshold) or owned more than 5% of the business at any time during the current or prior year.
K
Key Employee
For top-heavy testing purposes, an officer earning more than $230,000 (2025), a 5% owner, or a 1% owner earning more than $160,000. If key employees hold more than 60% of total plan assets, the plan is top-heavy.
L
Loan (Plan Loan)
A feature allowing participants to borrow from their own 401(k) balance — typically up to 50% of the vested balance or $50,000, whichever is less. Must be repaid within 5 years with interest.
M
Matching Contribution
An employer contribution based on the participant’s own elective deferrals. Common formulas include dollar-for-dollar on the first 3% of pay, or 50 cents on the dollar up to 6%.
N
NHCE (Non-Highly Compensated Employee)
Any employee who does not meet the HCE definition. NHCEs are the comparison group in ADP/ACP nondiscrimination testing.
New Comparability (Cross-Tested) Plan
A profit-sharing design that allows different contribution rates for different groups of employees, as long as the plan passes IRS cross-testing requirements. Often used to direct the majority of profit-sharing dollars to owners and key employees.
Nondiscrimination Testing
Annual tests required by the IRS to ensure that 401(k) plans do not disproportionately benefit highly compensated employees. The main tests are ADP, ACP, top-heavy, and coverage. Safe Harbor plans bypass ADP/ACP testing.
P
Participant Notice
Required disclosures provided to participants, including safe harbor notices, QDIA notices, fee disclosures (404a-5), summary plan descriptions, and summary annual reports.
Plan Administrator
The person or entity responsible for the day-to-day operation of the plan. A fiduciary role, typically the employer or a 3(16) fiduciary appointee.
Plan Document
The legal document that governs the retirement plan — eligibility, contribution formulas, vesting schedules, distribution rules. Must be kept current with all applicable law changes.
Profit-Sharing Contribution
A discretionary employer contribution allocated to participants’ accounts as a percentage of compensation. Not contingent on employee deferrals.
Q
QACA (Qualified Automatic Contribution Arrangement)
A Safe Harbor plan using automatic enrollment with a specific escalation schedule. Lower required employer contribution (3.5% match vs 4%), but employees must be auto-enrolled at minimum 3%.
QDIA (Qualified Default Investment Alternative)
The default investment for auto-enrolled participants who don’t make an active election. Typically a target-date fund. Provides fiduciary liability protection.
QDRO (Qualified Domestic Relations Order)
A court order assigning a portion of a participant’s retirement account to a former spouse, child, or dependent as part of a divorce or separation.
R
Recordkeeper
The company that maintains participant account records, processes contributions and distributions, provides the investment platform, and handles participant communications. Separate from the TPA. Common recordkeepers: Fidelity, Schwab, John Hancock, Principal, Empower.
Required Minimum Distribution (RMD)
The minimum amount that must be distributed from a retirement account each year once the participant reaches age 73 (under SECURE 2.0). A 25% excise tax applies to amounts not distributed on time.
Roth 401(k)
After-tax employee deferrals. Qualified distributions (after age 59½ and the 5-year holding period) are completely tax-free, including investment earnings.
S
Safe Harbor 401(k)
A plan design that automatically satisfies ADP/ACP nondiscrimination testing by requiring a minimum employer contribution — either a 3% non-elective contribution to all eligible employees or a 4% matching contribution. The trade-off is the mandatory employer cost; the benefit is that HCEs can defer the maximum without testing risk.
SECURE 2.0 Act
Legislation signed December 2022 expanding retirement plan access. Key provisions: startup tax credits up to $5,000/year for 3 years, required auto-enrollment for new plans starting 2025, expanded catch-up rules.
Summary Plan Description (SPD)
An ERISA-required document describing the plan in plain language — eligibility, contributions, vesting, distributions, and participant rights. Due to new participants within 90 days of eligibility.
T
Top-Heavy Plan
A plan where key employees hold more than 60% of total plan assets. Must provide a minimum 3% contribution to all non-key employees.
TPA (Third-Party Administrator)
A firm that handles the compliance and administrative side of a retirement plan — plan document drafting, nondiscrimination testing, Form 5500 preparation, contribution calculations, and government filings. Works alongside (but separately from) the recordkeeper and financial advisor.
V
Vesting Schedule
Determines when a participant earns full ownership of employer contributions. Employee deferrals are always 100% vested. Employer contributions can use cliff vesting (100% after a set period, typically 3 years) or graded vesting (increasing over 2–6 years). Safe Harbor contributions must be immediately 100% vested.
Voluntary Correction Program (VCP)
An IRS program for voluntarily correcting plan errors before audit. Common corrections: missed deferrals, late deposits, eligibility errors, loan failures. Requires filing with the IRS and a fee based on plan assets.
Have questions about a term not listed here? Independent Retirement provides flat-fee, conflict-free plan administration for Oregon businesses and their advisors. Schedule a free consultation to talk through your plan.