People in the retirement plan business sure do like their acronyms. All these letters get thrown around, and I do not know what half of them mean.
What do all those acronyms stand for?
We couldn’t agree with you more. All that alphabet soup can be tough to keep straight, especially if you don’t work with these concepts on a regular basis. Have no fear; DWC is here to help you make sense of it all.
Every so often, we will include an installment of the QOTW that explains some of these acronyms. For this installment, we will cover some of the basics.
What It Means: Defined Contribution Plan
How to Pronounce It: D-C Plan
What It Is: This is one of two broad categories of retirement plans and refers to any type of plan in which the benefits are based on the amounts the employees and the employer contribute. Examples include 401(k) plans, 403(b) plans, and profit sharing plans.
What It Means: Defined Benefit Plan
How to Pronounce It: D-B Plan
What It Is: This is the other broad category. It includes plans in which the plan document specifies the benefit to be provided, and an actuary determines how much the company must contribute each year to fund that promised benefit. Examples include not only traditional pension plans but also cash balance plans.
What It Means: Automatic Contribution Arrangement (also the Affordable Care Act, a/k/a Obamacare, if we are talking about health benefits instead of retirement benefits)
How to Pronounce It: acka
What It Is: This is the “proper” name for an automatic enrollment feature in a DC plan. In the typical 401(k) plan, eligible employees must make an election to contribute. If they do not make such an election, then no deferrals are withheld. In an ACA, that is reversed. The plan sets a default rate (maybe 3% of pay). Any participant who does not make a different election is automatically set to defer at the default rate. There are several types of ACAs, and we will cover those in a future QOTW.
What It Means: Actual Deferral Percentage and Actual Contribution Percentage Tests
How to Pronounce It: A-D-P or A-C-P Test
What It Is: The ADP test is one of the annual nondiscrimination tests that 401(k) plans are required to satisfy. It compares the average deferral rate of the highly compensated employees (“HCE’s”) to that of the non-HCEs to make they are within an acceptable range. The ACP test is similar except that it reviews employer matching contributions (as well as certain employee after-tax contributions). The ACP test can also apply to certain 403(b) plans, but the ADP test does not.
What It Means: Highly Compensated Employee
How to Pronounce It: H-C-E
What It Is: HCEs are generally those who fall into one of two categories:
- Those who own more than 5% of the company that sponsors the retirement plan, and
- Those who earned more than a set dollar limit in total compensation from the plan sponsor in the immediately preceding year. The dollar limit for 2018 is $120,000 and is indexed for inflation.
This determination is important, because most the nondiscrimination tests that are required each year compare the benefits of the HCEs to those of the non-HCEs.