401(k) glossary
·
Plan types
Traditional 401(k)
Short definition
A traditional 401(k) is a 401(k) plan without safe harbor contributions. The employer chooses whether to contribute and can apply a vesting schedule, and the plan must pass ADP, ACP and top-heavy testing each year.
What a traditional 401(k) is
The IRS uses “traditional 401(k)” for the standard plan design. Employees defer part of their pay. The employer may add a match, a profit sharing contribution, both or nothing, and can change the amount from year to year. Employer money can vest over time. In return for that flexibility, the plan is tested every year to show it does not favor highly compensated employees. (People also say “traditional” to mean pre-tax contributions, as opposed to Roth.)
Why it matters to employers
A traditional design lets you control contribution cost and use vesting to reward tenure. The risk is testing. If lower-paid employees save little, owners and other highly compensated employees can receive refunds, or the company may owe corrective contributions. Companies with low participation often move to a safe harbor design for that reason.
Example
A 40-person company matches 50% of the first 6% of pay and uses a six-year graded vesting schedule. An employee earning $70,000 who defers 6% ($4,200) receives a $2,100 match. If she leaves after three years of service, she keeps 40% of her match account and forfeits the rest.
Common mistakes
Skipping mid-year test projections and learning about a failure after the year has closed.
Correcting a failed ADP test more than 2½ months after the plan year ends, which triggers a 10% excise tax on the employer.
Forgetting the top-heavy minimum contribution when key employees hold more than 60% of plan assets.
Basic Capital and this term
Basic Capital’s Traditional 401(k) lets the employer set eligibility, vesting, match and profit sharing.
Go deeper
Read the full employer guide related to: Traditional 401(k)
→
Sources
Internal Revenue Service: 401(k) plan overview (https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview), retrieved 2026-11-11 Internal Revenue Service: 401(k) plan fix-it guide: The plan failed the 401(k) ADP and ACP nondiscrimination tests (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests), retrieved 2026-11-11 Internal Revenue Service: Is my 401(k) top-heavy? (https://www.irs.gov/retirement-plans/is-my-401k-top-heavy), retrieved 2026-11-11
General information, not legal or tax advice.
