Employee Benefits Glossary of Terms

Employee benefits are various types of non-wage compensation that employers can provide workers along with their wages or salaries. They've become some of the most critical parts of compensation packages. Benefits like health insurance are key for hiring and retention; in fact, 70% of small business employees in a TriNet survey said they're unlikely or very unlikely to accept a job that doesn't offer health benefits. 50% also said health insurance is a primary reason they're staying at their job. Want to know more about employee benefits, but don't know where to start? Use this glossary to find and review the most common benefits terms. Click on any of the letters below to jump to words that start with that letter.

A B C D E F G H I J K L M N O P Q R S T U V W

A

Accrual, Leave

The amount of leave (e.g., vacation and sick time) an employee has earned under company policy but which has not been taken or paid.

Actual Contribution Percentage (ACP) Test

A type of annual 401(k) nondiscrimination test to ensure the plan does not disproportionately favor highly compensated employees over non-highly compensated employees. The ACP test considers employer 401(k) match contributions and/or employee after-tax contributions.

Actual Deferral Percentage (ADP) Test

Similar to the ACP test except that it considers only employees’ 401(k) deferrals/contributions. It does not include employer matching contributions.

Affordable Care Act (ACA)

A comprehensive healthcare reform legislation that includes an “employer mandate.” Under the mandate, Applicable Large Employers (ALEs) must provide ACA-compliant health coverage to at least 95% of their full-time employees, or pay a penalty.

Affordability

Refers to the ACA’s requirement that ALEs must offer coverage that is “affordable,” or pay a penalty. The Internal Revenue Service (IRS) annually publishes the affordability percentage for each year.

After-Tax Contributions

Usually refers to 401(k) contributions that are deducted from the employee’s wages after income taxes are taken out. After-tax contributions do not reduce the employee’s taxable wages.

Allowed Amount

The maximum amount that a health insurance plan will pay to a healthcare service covered by the plan.

Ancillary Benefits

Add-on benefits that enhance an employee’s job-based health insurance plan. May include life insurance, vision insurance, dental insurance, critical illness insurance, and long-term insurance.

Automatic Enrollment

Enables an employer to automatically enroll an employee in the company’s 401(k) plan, unless the employee chooses to opt out. With automatic enrollment, the employer automatically deducts the employee’s 401(k) deferrals from their wages.

B

Benefits Administration

The process of designing, developing, managing, and maintaining the company’s employee benefits programs.

Benefits Administration Technology

An automated system that HR and benefits professionals can use to reduce paperwork and streamline the benefits administration process, including open enrollment.

Blackout Period

A period of time — often, up to 60 days — when 401(k) participants are suspended from making changes to their 401(k) accounts. Typically, this happens when a major change is being made to the plan.

Broker

A state-licensed individual who helps employers research, design, and market their employee benefits packages. Brokers can assist with cost control, custom plan design, employee education, plan implementation, and compliance.

C

Carrier

A vendor that sells employee benefits products — e.g., health and life insurance plans — through a broker or directly to an employer.

Cafeteria Plan

A written employer plan that meets the requirements of Section 125 of the Internal Revenue Code and allows employers to offer certain employee benefits on a pretax basis.

Carve-Out Plan

Supplements an employee’s standard health insurance by covering specialized services or products, such as pharmacy benefits or treatment for chronic diseases.

Catch-Up Contributions

Permits 401(k) participants aged 50 or older to contribute an extra amount yearly to their 401(k) accounts.

COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires covered employers to offer continuation of group health coverage to qualified beneficiaries who would otherwise lose coverage due to certain life events — e.g., divorce or termination of employment..

Commuter Benefits

An employer-sponsored benefit that lets employees set aside pretax money (via payroll deduction) to pay for qualified parking expenses, public transit, or ridesharing.

Compensatory Time-Off

The practice of using paid time off to compensate nonexempt employees for overtime hours worked. In the private sector, compensatory time-off for nonexempt employees is illegal.

Coinsurance

The amount (typically, a percentage) a person pays for a covered healthcare service, after the deductible has been paid.

Co-payment

The fixed amount (e.g, $20) a person pays for a covered healthcare service, normally at the time service is rendered.

Cost Sharing

Refers to how the costs of a health plan are shared between the employer and the employee. For example, the employer covers 70% of the cost while the employee shoulders 30%.

Custodian

Responsible for safeguarding the assets in a 401(k) plan. The custodian is usually a bank, which holds the plan’s securities investments and other financial assets.

D

Deductible

The amount an individual must pay during the coverage period for eligible healthcare expenses, before the insurance plan starts paying anything.

Defined Contribution Plan

A retirement plan in which the employer, the employee, or both, contribute to the employee’s account. Includes 401(k), 403(b), and profit-sharing plans.

Dependent

Any person — such as a spouse or child — who is covered under the primary insured’s plan.

Dependent Care Assistance Plan (DCAP)

Allows employees to set aside pretax money (via payroll deduction) to pay for qualified childcare or eldercare expenses.

Disability Insurance

A type of insurance that replaces part of an employee’s income if they cannot work due to falling ill or being injured.

E

Elective Deferrals

The amount an employee authorizes an employer to deduct from their salary/wages and transfer to their 401(k) account.

Electronic Data Interchange (EDI)

The electronic communication of information, which ultimately eliminates tedious paper processes. Employers can use EDI to electronically send benefits enrollment data to carriers.

Employee Assistance Program (EAP)

A voluntary and confidential employer-sponsored program that provides free services to employees (and covered family members) who are having work-related or personal problems. Services include assessments, short-term counseling, and referrals.

Employee Stock Ownership Plan (ESOP)

An employee benefit plan that permits employees to own shares in the company.

Employer Contributions

The amount an employer pays toward an employee benefit plan, on behalf of its employees, such as an employer’s contribution towards employees’ health insurance or 401(k).

ERISA

The Employee Retirement Income Security Act (ERISA) is a sweeping federal law that sets the standards for most employer-sponsored health and retirement plans, including disclosure and reporting criteria.

Excess Contribution 

Occurs when an employee’s 401(k) contributions exceed the legal limit. Excess contributions will cause the 401(k) plan to fail the ADP test.

Exclusive Provider Organization (EPO)

A type of healthcare plan that covers only services administered within the plan’s network, except in emergency cases.

F

Family and Medical Leave Act (FMLA)

The Family and Medical Leave (FMLA) provides up to 12 weeks of unpaid, job-protected leave to eligible employees for a covered reason, such as to bond with their newborn child or take care of a family member who has a serious health condition.

Flexible Spending Account (FSA)

An employer-sponsored benefit that enables employees to set aside pretax money (via payroll deduction) to pay for qualified out-of-pocket healthcare expenses.

Floating Holiday

A paid day off that some employers offer in addition to vacation time, sick time, and paid holidays observed throughout the year. These employees typically get 1 or 2 days off (for floating holidays purposes) per year. They also get to choose when to take the floating holiday.

Form 5500 Filing

Covered employers with applicable health and welfare plans and retirement plans must file Form 5500 annually to satisfy ERISA’s reporting requirements.

Fringe Benefits

“A fringe benefit is a form of pay (including property, services, cash or cash equivalent) in addition to stated pay for the performance of services.” Defined by the IRS.

Fully-Insured Plan

With a fully-insured plan, the employer purchases health coverage from the insurance carrier plus pays a premium to the carrier.

H

Hardship Withdrawal

Allows 401(k) participants to withdraw money from their 401(k) account to meet an immediate and heavy financial need.

Health Maintenance Organization (HMO)

A type of health insurance plan that gives members access to healthcare providers who are within the plan network. To receive coverage, employees must stay within the network, except in emergency situations. They must also choose a primary care provider within the network.

Health Reimbursement Arrangement (HRA)

An employer-funded account that reimburses employees for covered healthcare expenses.

Health Savings Account (HSA)

A personal savings account that lets employees with a high deductible health plan set aside pretax money (via payroll deduction) to pay for eligible healthcare expenses.

High Deductible Health Plan (HDHP)

A type of health insurance plan that has a higher deductible than traditional plans and typically lower monthly premiums.

Highly Compensated Employee (HCE)

In terms of 401(k), an HCE is an employee who owns (or owned) more than 5% of the interest in a business at any time during the present or previous year.

HIPAA

The Health Insurance Portability and Accountability Act (HIPAA) is a federal law that sets the rules and regulations for protecting health information.

Individual Retirement Account (IRA)

An investment account that lets individuals save for retirement. An IRA can be traditional, meaning pretax; or Roth, meaning after-tax.

In-Network Provider

A  doctor, hospital, healthcare provider, or pharmacy that a health plan contracts with to deliver healthcare services to its members.

K

Key Employee

For 401(k) purposes, a key employee is anyone who satisfies the IRS’ 5% owner test, 1% owner test, or officer test. Key employees are used to determine whether a 401(k) plan is top-heavy.

L

Leave

Employee time-off from work. Some leaves are required by law; others are given at the employer’s discretion. May be paid or unpaid. Examples of employee leave:

• Vacation time
• Sick time
• Personal time
• Family leave
• Disability leave
• School activity leave
• Bereavement leave
• Military leave
• Funeral leave
• Jury duty leave
• Voting leave
• Victims leave
• Adoptive parent leave
• Public service leave
• Organ donor leave

M

Major Medical Plan

A comprehensive health insurance plan that goes beyond standard health coverage and includes hospital stays and large medical expenses.

Mandatory Benefits

Employee benefits that a federal, state, or local law requires an employer to provide, such as state-mandated paid sick leave.

Marketplace

Also known as the “Exchange,” the Marketplace offers health plan shopping and enrollment services via call centers, websites, and in-person assistance. The Small Business Health Options Program (SHOP) Marketplace is available to small businesses looking to buy health insurance for their employees.

Minimum Essential Coverage

Any health insurance plan that satisfies the ACA’s criteria for having health coverage, including the ACA’s 10 essential health benefits.

Minimum Value

To be ACA-compliant, a health insurance plan must not only contain minimum essential coverage, but also have minimum value — meaning an actuarial value of at least 60%. To fulfill the minimum value rule, the plan must pay no less than 60% of the total medical benefits covered by the plan.

N

Nondiscrimination Testing

Refers to the annual compliance tests that a 401(k) plan must undergo to confirm that it does not disproportionately favor highly compensated employees over non-highly compensated employees. Includes the ACP and ADP tests.

Nonelective Contributions

A contribution that an employer chooses to make to an employee’s 401(k) account, regardless of whether the employee makes a 401(k) salary deferral.

Non-Highly Compensated Employee (NHCE)

An employee who does not meet the definition of “highly compensated employee” for 401(k) purposes.

Non-Qualified Plan

A retirement plan that is not subject to ERISA. Nonqualified plans are often deferred compensation arrangements, where the employer agrees to delay paying a portion of an employee’s compensation until a later date.

O

Open Enrollment Season

“A period of time when employees may elect or change the benefit options available through their employer, such as health, dental and life insurance, and ancillary or voluntary benefits ranging from legal services to pet insurance.” Defined by the Society for Human Resource Management.

Out-of-Network Provider

A healthcare provider who does not have a contract with a health insurer to provide services within the plan’s network.

Out-of-Pocket Limit

The maximum an insured can be required to pay for covered healthcare services in the plan year.

P

Plan Administrator

The person or entity responsible for managing the day-to-day aspects of an employer’s benefit plan, as designated in the plan document.

Plan Document

A written instrument outlining the administration and operation of an employee benefit plan.

Plan Sponsor

From an employment perspective, a plan sponsor is an employer who establishes and offers an employee benefit plan (such as a group health plan or a retirement plan) to its employees.

Point of Service (POS) Plan

A type of health insurance plan that allows members to access care from in-network and out-of-network providers. However, members must choose a primary care provider.

Preferred Provider Organization (PPO)

Covers both in-network and out-of-network healthcare. Members do not have to choose a primary care provider.

Premium

The amount an employer pays for health insurance coverage. Employees pay their share of premium via payroll deduction.

Pre-tax Deductions

Money deducted from an employee’s wages before applicable payroll taxes are withheld. Pretax deductions reduce the employee’s taxable wages.

Q

Qualified Plan

A plan that satisfies applicable requirements of the Internal Revenue Code, such as a qualified retirement plan or cafeteria plan. .

Qualifying Event

The life change — e.g., marriage, divorce, or childbirth — that allows an employee to modify their benefits coverage outside of open enrollment.

R

Recordkeeper, 401(k)

The recordkeeper tracks the plan’s assets and ensures the employer’s 401(k) records are legally compliant.

Rollover, 401(k)

Allows participants to transfer money from their 401(k) plan to another eligible retirement plan, such as a new 401(k) or an existing IRA.

Roth 401(k)

An employer-sponsored retirement plan that lets participants make after-tax contributions.

S

Safe Harbor 401(k)

A type of 401(k) plan that includes mandatory employer contributions, plus enables employers to avoid the ACP and ADP tests if certain conditions are met.

Self-Insured Plan

With a self-insured plan, the employer takes on the financial risk of providing health insurance to its employees, instead of buying coverage from an insurer.

SIMPLE 401(k)

A type of 401(k) plan designed for small businesses with 100 or fewer employees.

Special Enrollment Period

A period outside of open enrollment that allows employees to enroll in benefits or modify their benefits. Typically lasts 30 days.

Summary Annual Report (SAR)

A summary of an employer’s annual Form 5500 filing that must be given to plan participants.

Summary of Material Modifications (SMM)

A document informing participants of material changes made to the plan, such as removal or reduction of benefits or changes to eligibility requirements.

Summary Plan Description (SPD)

“An important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan and how to file a claim for benefits.” Defined by the United States Department of Labor.

T

Top-Heavy

A 401(k) compliance test that ensures the plan does not disproportionately favor key employees over non-key employees. The plan is top-heavy when key employees own more than 60% of the total plan assets.

Traditional 401(k)

Allows employees to make 401(k) contributions on a pretax basis.

U

Unemployment Insurance

A joint federal-state program that provides cash benefits to eligible workers, such as those who lose their job through no fault of their own.

Unemployment SUB Plan

An employer-sponsored benefit that provides severance pay to employees who are involuntarily terminated, such as via layoff or plant closing. SUB plan payments make up the difference in the discharged worker’s state unemployment compensation and their previous regular weekly wages.

V

Vesting

In a retirement plan, vesting refers to “ownership.” If all of the money in an employee’s 401(k) is 100% vested, it means the funds belong fully to the employee.

Voluntary Benefits

Employment benefits — such as 401(k) and life insurance — that are not required by law. Employers can choose to offer voluntary benefits and employees can accept or reject them.

W

Waiting Period

The period of time that must pass before an employee’s benefit coverage begins. For example, employees may need to wait up to 90 days (after enrolling) for their health coverage to kick in.

Wellness Program

An employer-sponsored benefit aimed at promoting, improving, and maintaining employees’ general health. May include weight loss, stress management, smoking cessation, gym membership, and health screenings.

Withdrawal, 401(k)

Refers to when a participant takes money out of their 401(k) account. The IRS usually imposes an early-withdrawal penalty of 10% on participants who pull money from their 401(k) before turning age 59½.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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