401(k) glossary for employers

A 3(16) fiduciary is the plan administrator defined in section 3(16) of ERISA, responsible for running the plan day to day. If the plan document names no one else, the employer is the 3(16) administrator.

A 3(21) fiduciary, in everyday use, is an investment adviser who recommends a 401(k) plan’s investments as a co-fiduciary while the employer keeps the final decision. The name comes from section 3(21) of ERISA.

A 3(38) fiduciary is an investment manager, as defined in section 3(38) of ERISA, with discretion to choose and change a plan’s investments. It must be a registered investment adviser, bank or insurance company.

A 401(k) loan lets a participant borrow from their own account and repay it with interest, usually through payroll deductions. The most a participant can borrow is 50% of their vested balance, up to $50,000.

A 401(k) plan audit is an independent accountant’s audit of the plan’s financial statements, filed with Form 5500. It is generally required when a plan has 100 or more participants with account balances at the start of the plan year.

A 403(b) plan is a retirement plan for public schools, churches and 501(c)(3) nonprofits. It works much like a 401(k) and shares the same employee deferral limit, $24,500 in 2026. For 2027 the deferral limit rises to $25,500, plus an $8,500 catch-up at 50 or older.

A 404(a)(5) disclosure is the notice a 401(k) plan administrator must give participants about the plan’s fees and investment options, before they first invest and at least once a year after that.

A 408(b)(2) disclosure is the written statement a 401(k) service provider must give the plan’s responsible fiduciary, describing its services, whether it acts as a fiduciary, and all the compensation it expects to receive.

The ADP and ACP tests compare what highly compensated employees contribute to a 401(k), and receive in match, with what other employees do. If the gap is too wide, the plan fails and must correct.

After-tax contributions are employee contributions to a 401(k) made from taxed pay that are not Roth deferrals. They do not count toward the $24,500 deferral limit but do count toward the $72,000 total limit for 2026. For 2027 the total limit rises to $75,000.

The annual additions limit, set by section 415(c) of the tax code, caps total contributions to one person’s account in a plan year from all sources. For 2026 it is the lesser of $72,000 or 100% of pay. For 2027 it rises to $75,000.

The auto-enrollment tax credit gives an eligible small employer $500 a year for three years for adding an automatic enrollment feature to a 401(k) or SIMPLE IRA plan. It is separate from the startup costs credit.

An auto-IRA is a state-run retirement program that requires covered employers without a retirement plan to enroll employees automatically in payroll deduction IRAs. Employees can opt out, and employers do not contribute.

Automatic enrollment means a 401(k) plan starts deducting a default percentage of pay for each eligible employee unless they opt out or choose another rate. Most 401(k) plans established after December 29, 2022 must use it.

Automatic escalation raises an employee’s 401(k) deferral rate by a set amount each year, usually 1% of pay, until it reaches a cap. Employees can opt out or choose a different rate at any time.

A beneficiary designation names who receives a participant’s 401(k) balance at death. In most 401(k) plans a married participant’s spouse is the automatic beneficiary unless the spouse consents in writing to someone else.

A blackout period is a stretch of more than three consecutive business days when 401(k) participants cannot change investments or take loans or distributions. The plan administrator must give 30 to 60 days' advance notice.

A brokerage window, or self-directed brokerage account, is an optional 401(k) feature that lets participants invest beyond the plan’s core fund menu, for example in individual stocks and exchange-traded funds.

A cash balance plan is a defined benefit plan that states each participant’s benefit as a hypothetical account balance, which grows with employer pay credits and a set interest credit.

A cash-out distribution lets a plan pay out a former employee’s small vested balance without their consent. The limit is $7,000 for distributions after 2023, and amounts over $1,000 must go to an IRA unless the person chooses otherwise.

Catch-up contributions are extra 401(k) deferrals allowed for employees aged 50 or older, on top of the regular deferral limit. For 2026 the catch-up limit is $8,000, or $11,250 at ages 60 to 63. For 2027 the catch-up rises to $8,500, or $11,750 at ages 60 to 63.

The compensation limit is the most pay a plan can take into account for one person when it calculates contributions and runs tests. For 2026 it is $360,000, set under section 401(a)(17) of the tax code. For 2027 it rises to $375,000.

A controlled group is two or more businesses with enough common ownership that the tax code treats them as one employer for retirement plan rules, including coverage, testing and contribution limits.

A corrective distribution is a refund of 401(k) contributions to highly compensated employees after a failed ADP or ACP test. A QNEC is the alternative fix: an extra, fully vested employer contribution for other employees.