U.S. Department of Labor
Small Business Retirement Savings Advisor
Glossary of Terms
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.
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.
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) 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) IRA
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.
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.
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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