Glossary of 401(k) Terminology
401(k) PLAN - a retirement plan established and regulated by Internal Revenue Code section 401(k) that allows employees to choose to defer a portion of their salary and the payment of the taxes on that deferral until retirement (pre-tax deferral or contribution)
ASSET ALLOCATION - the act of investing in different types of assets to minimize investment loss and reduce volatility
BREAK IN SERVICE - a plan year during which you do not receive pay for 500 hours of work or are not given vesting credit for 500 hours of service
COMPENSATION - total salary, pay or earned income received from your employer, as reflected on your Form W-2; compensation definition may also be defined by the employer in the Summary Plan Description for the plan
DISABILITY - an illness or injury that is potentially permanent and must be certified by an approved physician by the employer; that prevents you from performing a job for which you were qualified for a period of at least 12 months
EARLY RETIREMENT - an age other than the 'normal' retirement age, described in the plan, at which a participant may retire; example: a participant may choose 'early retirement' if the plan allows retirement at age 55 with 10 years of service
EFFECTIVE DATE - the date that either the plan starts or an amendment takes effect
ELECTIVE DEFERRAL - the amount of your salary you decide to have deposited to your 401(k) instead of receiving it in cash; the employer contributes this to the plan on your behalf
ENTRY DATE - the date on which you may start participating in the plan after you have met the plan's eligibility requirements; requirements and entry dates may vary from plan to plan
ERISA - Employee Retirement Income Security Act - law established in the United States that controls the operations of private pension plans to prevent mismanagement
ERISA SECTION 404(c) - refers to a participant directed investment program where the participant has a broad array of investments to choose from and the participant can exercise control over these investments. The participant also will have been given information and resources to make informed decisions concerning these investment choices
FAMILY MEMBER - a spouse or lineal ascendant or descendant (or spouse thereof) of either a 5% owner of the employer or one of the 10 Highly Compensated Employees (HCE) of the employer
HIGHLY COMPENSATED EMPLOYEE - an employee who during the current or prior year met any of the following criteria:
- a 5% owner of the employer;
- received more than $80,000 in compensation as adjusted for inflation
- a Family Member (a spouse or lineal ascendant or descendant (or spouse thereof)) of a 5% owner or one of the group of the top 10 employees with the greatest compensation; this designation will be combined as if they were one person for purposes of compensation and contributions
HOUR OF SERVICE - typically credit will be given for each hour worked for which compensation is paid to include vacation, sickness, leave of absence, or disability or back pay if hours were not already counted; verify with the Summary Plan Description of your plan.
MATERNITY/PATERNITY LEAVE - additional hours of service may be granted if you leave employment even temporarily, due to childbirth or adoption (hours may be credited to prevent a 'Break in Service'; verify this information in the Summary Plan Description of your plan
NORMAL RETIREMENT AGE - the attainment of an age specified in the plan document, usually age 65
PRE-TAX CONTRIBUTIONS - also known as elective deferrals; deductions from your gross compensation prior to the payment of federal income taxes that are withheld.
ROTH CONTRIBUTIONS - also known as elective deferrals-deductions from your compensation after federal income taxes are withheld. Earnings will be tax free at retirement if certain criteria are met.
QUALIFIED DOMESTIC RELATIONS ORDER - a court order issued under the state domestic relations law related to divorce, separation, custody or support proceedings by which a person other than the 401(k) account owner may receive the benefits of the 401(k) plan.
SPOUSE - a person to whom you are now or were legally married or a common law spouse as recognized by the state in which you reside; former spouse may be defined as 'SPOUSE' as it would pertain to a "Qualified Domestic Relations Order" (QDRO)
SUMMARY PLAN DESCRIPTION - the detailed description of the 401(k) plan as adopted by the employer; also known as the SPD
TAX DEFERRAL - delaying the tax consequence of your deposits and earnings on your deposits until you withdraw these deposits at retirement
YEARS OF SERVICE – (1) for the purpose of eligibility to participate in the plan: 12-consecutive months from the date of hire during which the participant is credited with at least the required hours of service; (2) for the purposes of determining entitlement for contribution allocation: 12-consecutive months that are the same months as the plan year; during which the participant is credited with at least the required hours of service; (3) for purposes of determining the extent to which a participant is vested in the account balance: 12-consecutive months that are the same as the plan year, during which the participant is credited with at least the required hours of service
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