Glossary: Employee Benefits

In addition to salary, some jobs offer perks as well. Employee benefits are a crucial aspect of any employment arrangement, encompassing a range of offerings from health insurance and retirement benefits to sick leave and beyond. 

Before entering into any employment agreement, it is essential to understand the details of these plans and consider how they align with your needs and expectations. 

We've assembled a glossary containing definitions of common employee benefit plans along with many terms that are often used in those plans.

Employee Benefits Glossary

401(k) plan: Named for the section number of the Internal Revenue Code that authorizes it, a 401(k) plan that allows an employee to choose what kind of investments the employer will make on the employee's behalf. The employer selects different investments to offer, while the employee chooses which they prefer. The investment options may vary in terms of risk and other factors.

Administrator: The person or company who handles day-to-day details of operating a health benefit or pension plan, such as processing claims for benefits, employer and employee contributions, record-keeping, and reports. The administrator is usually identified in the plan creation documents.

Affordable Care Act (ACA): Also known as Obamacare, the ACA is a comprehensive U.S. healthcare reform law that aims to increase access to health insurance, enhance consumer protections, and control healthcare costs.

Beneficiary: A beneficiary is usually a member of an employee's family who is covered by the employee-benefits plan, and who may receive benefits under the plan.

Cafeteria plan: A plan in which the employer offers a variety of different benefits and the employees choose those benefits that fit their individual needs. Examples of benefits offered in the cafeteria include group-term life insurance, dental insurance, disability and accident insurance, and reimbursement of healthcare expenses.

COBRA: A federal law that requires employers to offer employees continuing medical insurance after the employee leaves the company. The employee pays the premiums while continuing to participate in the company's medical plan for up to eighteen months. The acronym COBRA stands for Consolidated Omnibus Budget Reconciliation Act.

Defined benefit plan: This kind of plan also may be referred to as a unit benefit plan. These terms refer to a plan in which employees are promised that upon retirement they will receive a specific amount of money according to a formula. This calculation may be based on how long the employee worked for the company and how much they earned. See Fixed benefit plan.

Defined contribution plan: This kind of plan refers to one in which the employer makes regular contributions of a specified amount of money. In contrast to a defined benefit plan, it does not promise the employees any specific amount of retirement benefits. The employee's retirement benefit will depend on how much was contributed to their account, and how the plan's investments performed over the years. Examples of this kind of plan include: 

• Profit-sharing plans
• Money-purchase plans
• Target-benefit plans
• Stock bonus plans
• Employee stock ownership plans

Disability insurance: A type of coverage that provides financial protection to individuals by replacing a portion of their income in the event of a disabling illness or injury that prevents them from working.

Eligibility: Different plans have different requirements about who is entitled to participate in a plan. These eligibility requirements can include the employee's age or how long they have been employed by the company. In general, an employee is eligible when they turn twenty-one or have been employed with the company for one year.

Employee Stock Ownership Plan (ESOP): This plan is primarily funded by the company's stock, and does not depend on whether the company has made a profit.

ERISA: ERISA is an acronym for the Employee Retirement Income Security Act. This is the federal law that regulates and enforces employee benefits and retirement plans.

Employee welfare plan: See welfare benefit plan.

Family and Medical Leave Act (FMLA): A U.S. federal law that entitles eligible employees to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage.

Fixed benefit plan: In this kind of plan, the amount of retirement benefits is based on a formula that does not include the number of years the employee worked for the company. It could be a particular dollar amount based on some percentage of the employee's pay.

Flexible benefit plan: See cafeteria plan.

Fringe benefits: Benefits provided by employers to employees in addition to their regular salary, such as health insurance benefits, retirement plans, or company cars.

Full-time employment: This refers to a work arrangement in which an individual is regularly scheduled to work the standard or customary number of hours established by the employer for a full workweek, often 40 hours per week.

Hourly wage: The amount of money a worker is paid for each hour of work performed, established through an agreement between the employer and the employee.

Individual Retirement Account (IRA): People who are not covered by any pension plan at work may use an IRA to save for retirement. In a traditional IRA, the contributions are made from the person's taxable income and grow tax-free in the IRA. A Roth IRA is funded from a person's income but is not taxed in the year it is earned. Instead, the income grows over the years and is taxed when the person withdraws it after they retire. Note that an IRA is not considered a pension plan, and the provisions of ERISA do not apply.

IRC: This is an acronym for the Internal Revenue Code.

Keogh Plan: This is a qualified retirement plan for self-employed individuals. Contributions to this plan are tax-deductible. The individual can direct the investment of the funds that are put into a Keogh, e.g., stocks, bonds, or mutual funds.

Minimum wage: The legally mandated lowest amount of compensation that employers must pay to their workers for a specified period of labor. States can set minimum wages that are higher than the federal minimum wage.

Money-purchase plan: A defined-benefit plan in which the employer must contribute a specific amount of money each year to each participant's account. The amount of each contribution generally depends on that person's pay.

Multi-employer plan: In this kind of plan, two or more employers pool their contributions for the benefit of their employees. The plan may be established and maintained according to the terms of a collective bargaining agreement between the employers and a labor union, but this kind of plan may also be set up for the employers' non-union employees.

Normal retirement age: By law, an employer cannot dictate when an employee must retire as that would be age discrimination. The employer may create a pension plan based on the assumption that employees will decide to retire at some age, and the employer can decide what that age will be. Companies often pick age 65, although some pick 62 or 59.

Participant: Another way of saying employee, participant refers to an employee who is covered by or opts to participate in any employee-benefits arrangement.

Plan sponsor: The entity that establishes and maintains a benefits plan. The plan sponsor is usually an employer, but may also be an employee organization created to offer benefits. If the plan is a multi-employer plan, the committee or other entity that established the plan is considered the plan sponsor.

Portability: This term refers to an employee's ability to transfer vested benefits to an IRA or some other pension plan after they leave the company. Without portability, the employee could be subject to large tax bills. Portability also may refer to an employee's ability to transfer eligibility for medical insurance coverage without running into the problem of coverage denials based on a pre-existing medical condition.

Profit-sharing plan: The name of this kind of plan is a little misleading. A profit-sharing plan may be funded from the company's profits but is not required to be. The terms of a profit-sharing plan will either set forth a formula to determine how much should be contributed each year or leave the amount to the employer's discretion. Unlike other kinds of plans, a profit-sharing plan may be set up in a manner that makes it tax-exempt. Refer to the entries for employee stock option plan and stock bonus plan for a description of two common forms of a profit-sharing plan.

Qualified plan: A qualified plan complies with ERISA. It requires certain standards of vesting and accrual of benefits, and compliance with nondiscrimination rules. A qualified plan entitles the employer and its employees to the favorable tax treatment provided in the Internal Revenue Code.

Retirement plan: A retirement plan provides retirement income or is a savings device in which contributions appreciate over time, with income taxes deferred until withdrawals are made when an employee reaches a certain age or takes money out before reaching that age.

Sick leave: A workplace policy that allows employees to take time off from work with continued pay or benefits when they are ill or experiencing health-related issues.

SIMPLE plan: SIMPLE is an acronym for "savings incentive match plans for employees." It describes a plan in which employees can make tax-deferred investments and the employer makes matching contributions. The plan can take the form of an IRA or a 401(k) plan.

Simplified Employee Pension (SEP): In a SEP, the employer directly funds IRAs or annuities established by or on behalf of the employees.

Social Security: A government program that provides financial assistance, including retirement, disability, and survivor benefits, to eligible individuals based on their work history and contributions through payroll taxes.

Stock bonus plan: Shares of the company's stock fund this plan.

Summary plan description: This document summarizes the major features of an employee benefit plan: what kind it is, how it's funded, who's eligible to participate, the necessary steps to participate, how to pay benefits, etc.

Target-benefit plan: In this kind of plan, the employer has some idea of what participants should receive for retirement benefits and uses an actuarial formula that will meet that target amount by the time the employee is ready to retire. It does not promise a particular amount of benefits, however.

Thrift or savings plan: This kind of plan indicates that the participating employees must make contributions. The employer may make matching contributions but isn't required to do so.

Top-hat plan: A top-hat plan is one offering unfunded deferred compensation plans for upper management or highly compensated employees. A top-hat plan is not subject to some provisions of ERISA. See top-heavy plan.

Top-heavy plan: This plan provides benefits for key employees, such as officers or owners of the company, that are worth an additional 60% or more than the benefits offered to regular employees. A top-heavy plan may require shorter vesting periods for regular employees to balance things out. See vesting.

Vesting: The process by which contributions to a pension plan for a particular employee may no longer be forfeited. It usually requires that the employee be with the company for a specified period before they will be eligible for the benefits after retirement. Until then the employee is not vested. If the employee quits or is fired, or if the company has layoffs, the employee may lose those benefits. The contributions are paid out in a lump sum and are subject to portability. 

Some plans provide for graded vesting. This means that an employee is vested over time so that each year a higher percentage of contributions are nonforfeitable until 100% are nonforfeitable. With graded vesting, the vesting period may be up to seven years. Cliff vesting is a plan providing that an employee is not vested at all until the specified amount of time elapses. With cliff vesting, the vesting period cannot exceed five years.

Welfare benefit plan: A welfare benefit plan provides medical benefits and other non-pension benefits to employees and their families. The kinds of benefits offered are those provided to individual employees as money or services. These benefits can include:

• Various kinds of insurance
• Special arrangements for pre-paid legal services
• Scholarships
• Training program
• Education
• Daycare

In some cases, the employees can choose which benefits they would like to participate in, according to their individual needs. These are also known as cafeteria plans.

Withdrawal liability: If an employee takes money out of a retirement plan too early, they may be liable for income taxes and a tax penalty. The idea is to make early withdrawals unattractive so that funds will stay invested for retirement.

Workers' compensation: A form of insurance providing wage replacement and medical benefits to employees who suffer work-related injuries or illnesses.

Speak to a Lawyer About Your Employee Benefits

Consulting with an employment law attorney can be helpful when navigating the complexities of employee benefits packages. An attorney can help you negotiate and enforce benefits such as health insurance and retirement plans. They play a vital role in ensuring you're well-informed and can offer representation in case of disputes or issues related to employee benefits.