Glossary for Retirement Plan Provisions for Private 

Industry Workers in the United States, 2022

For use starting with the retirement provision publication containing reference year 2022 estimates. 

This glossary is updated periodically to reflect changes in the National Compensation Survey. 

Information is applicable to estimates published as of this glossary's release date. Prior versions of 

the glossary are available on the NCS benefits publications list. Information on survey concepts, data 

sources, design, and calculation is available in Handbook of Methods: National Compensation 

Measures. 

Retirement plans are classified as defined benefit or defined contribution plans.

Defined benefit plans

Defined benefit plans provide employees with guaranteed retirement benefits based on benefit 

formulas. An employee's retirement age, length of service, and preretirement earnings may affect 

the benefits received. Definitions, key provisions, and related terms follow.

Traditional defined benefit formulas

Traditional defined benefit plans provide a stipulated dollar amount at retirement or through a 

specified formula that includes factors such as career earnings, age, and years of service to provide 

a known dollar amount benefit.

Percent of terminal earnings. Benefits are based on a percentage of average earnings during a 

specified number of years at the end of a worker's career (or when earnings are highest), multiplied 

by the number of years of service recognized by the plan.

Percent of career earnings. Benefits are based on a percentage of an average of career earnings for 

every year of service recognized by the plan.

Dollar amount. Benefits are based on a dollar amount per month for each year of service recognized 

by the plan.

Percent of employer contribution. Benefits are based on employer and, occasionally, employee 

contributions. Benefits equal a percentage of total contributions.

Nontraditional defined benefit formulas

Nontraditional defined benefit plans are newer plan types that include cash balance plans and 

pension equity plans.

Cash balance plans. For each year worked, employees are credited with a specified contribution and 

a rate of interest on that contribution, which together will provide a future lump sum value at 

retirement. The lump sum may also be converted to an annuity.

Pension equity plans. For each year worked, employees are credited with a percentage applied to 

their final average earnings. Benefits generally are distributed as a lump sum, but may be converted 

to an annuity.
Eligibility requirements 

Age and the period of time an employee is expected to work for the employer (a service 

requirement) before becoming eligible to enroll in a defined benefit retirement plan. Some plans 

require employees to satisfy both the age and the service requirements before being able to enroll. 

An example of a minimum age requirement is 21 years and an example of a minimum service 

requirement is 12 months.

Frozen retirement plans

Frozen retirement plans are benefit plans that typically are closed to new enrollees and limit future 

benefit accruals for some or all active plan participants. Some may no longer allow participants to 

accrue additional benefits. Others may change the plan's prospective benefit formula in such a way 

as to limit or cease future benefit accruals for some active participants. The length of time is 

calculated based on the year the plan was modified.

Soft frozen plans. New employees are not allowed in the plan. Benefit accruals may continue for 

existing participants.

Hard frozen plans. Participants in these plans stop accruing benefits on the date the plan is frozen. 

The benefit the employee receives is calculated as of the day the plan was frozen.

Normal retirement 

Normal retirement is the specific age, length of service, or a combination of both, at which point 

participants may retire and receive all accrued benefits without a reduction or penalty. In most 

plans, participants must satisfy a minimum service requirement to be vested in the plan. The typical 

vesting requirement is 5 years of service; these requirements are not included in the service 

requirements for normal retirement. 

Age and service requirement. The participants' age and service (in years) must each meet the 

criteria as specified in the plan, and as long as both conditions are satisfied employees may retire 

without incurring a reduction in benefits. 

Age plus service requirement. The sum of participants' age and service (in years) must meet a total 

minimum number as specified in the plan, such as 80, and as long as the condition is satisfied 

employees may retire without incurring a reduction in benefits.

Early retirement 

Early retirement is the age, length of service, or combination of age and length of service at which 

plan participants may retire and receive all accrued benefits, minus a reduction or penalty. 

Flat percent per year. Reduction in the benefit amount for each year by which early retirement 

precedes normal retirement. In specific cases, flat percent per year reductions may approximate 

actuarial reductions, such as early retirement at age 55 with a reduction of 6 percent per year 

between age 55 and the plan's normal retirement age of 62. 

Variable. Reduction that is held constant within age brackets, but differs among brackets, sometimes 

in approximation of an actuarial table. For example, benefits may be reduced by 3 percent for each 

year between age 60 and the plan's normal retirement age, and by 6 percent for each year 

retirement precedes age 60. 
Actuarial. Reduction applied to the amount of the normal retirement benefit based on actuarial 

assumptions, so that on average, the beneficiary receives the total lifetime benefit of equal value 

regardless of retirement age.

Benefit payment methods

Payments from defined benefit plans may be in the form of a straight-life annuity, a joint-andsurvivor annuity, a percentage of the unreduced accrued benefit, or a lump sum.

Straight-life annuity. A periodic payment made for the life of the retiree, with no additional 

payments to survivors.

Joint-and-survivor annuity. An immediate annuity for the life of the participant and a survivor 

annuity for the life of the participant's spouse. The amount of the survivor annuity may not be less 

than 50 percent, or more than 100 percent, of the amount payable during the time the participant 

and spouse are both alive. The annuity payable for the life of the participant is lower than that for a 

straight-life annuity; to account for the increased length of time over which payments will be made, 

this reduction may be a percentage of the straight-life benefit, such as 10 percent, or may be based 

on the life expectancy of the participant and spouse (an actuarial reduction).

Percentage of unreduced accrued benefit. Under this method, the participant's pension is not 

reduced to adjust for survivor benefits. The participant will receive an amount equal to the straightlife annuity, and the spouse will receive a proportion of that amount, often 50 percent, should the 

participant die.

Lump-sum payment. The participant may opt for a full lump sum, with no further benefits received 

from the plan. If a plan provides for a partial lump-sum payment, the participant receives a reduced 

annuity as well.

Vesting

Vesting is the period of time a participant must work before earning a nonforfeitable right to a 

retirement benefit. Once the participant is vested, the accrued benefit is retained even if the worker 

leaves the employer before reaching retirement age.

Immediate full vesting. An employee is 100 percent vested immediately upon enrollment in the plan.

Cliff vesting. No vesting occurs until an employee satisfies the service requirements for 100 percent 

vesting, such as 5 years.

Graded vesting (or graduated vesting). An employee is entitled to an increasing share of 

nonforfeitable benefits, determined by the years of service with the employer, until eventually 

reaching full vesting. An example would be 50 percent vesting after 3 years of service, 75 percent 

vesting after 4 years of service, and 100 percent vesting after 5 years of service.

Integration with Social Security

Defined benefit plans may integrate retirement benefits with Social Security benefits. Under this 

approach, the employer’s contribution to Social Security Federal Insurance Contributions Act (FICA) 

taxes is taken into account when plan benefits are computed. Integration may be accomplished by 

an offset or a step-rate method.
Offset. Part of a participant’s Social Security benefit is subtracted from the benefit otherwise payable 

by the plan. The maximum allowable offset is 83.3 percent of the Social Security benefit.

Step rate (or Social Security breakpoint). Lower benefit rates are applied to earnings up to the 

specified taxable Social Security wage base (that is, the earnings subject to FICA tax); higher benefit 

rates are applied to earnings above the wage base.

Portability

Portability is a participant’s ability to maintain and transfer accumulated pension benefits when 

changing jobs. Portability provisions in defined benefit plans generally cover portability of assets, 

portability of credited service, or both.

Portability of assets. Participants can withdraw their accumulated pension benefits or transfer them 

to another retirement arrangement.

Portability of credited service. Participants are allowed to count the years of service with a previous 

employer when determining benefits from their current employer.

Disability retirement

Disability retirement is retirement resulting from a totally disabling injury or illness prior to eligibility 

for early or normal retirement. Plans providing disability retirement benefits may have a service 

requirement, such as 10 years or longer.

Immediate disability retirement. Benefits are available upon the onset of disability or after a waiting 

period, such as 6 months. Early retirement reductions do not apply to immediate disability benefits; 

participants’ service credits cease to accumulate once immediate disability benefits begin.

Deferred disability retirement. Service credits continue to accumulate and payments do not begin 

until participants are eligible for normal retirement.

Preretirement survivor benefits

In the case of death prior to retirement (or prior to eligibility for retirement benefits), the surviving 

spouse becomes eligible for an annuity for the rest of his or her life. At the time of death of the

participant, the benefits become fully vested. The amount of annuity is based on the benefit the 

participant would have been eligible for if retirement had occurred on the date of death.

Defined contribution plans

Defined contribution plans determine the value of individual accounts on the basis of the amount of 

money contributed and the rate of return on the money invested. Definitions, key provisions, and 

related terms follow.

Types of plans

Types of defined contribution plans include savings and thrift plans, money purchase pension plans, 

deferred profit-sharing plans, employee stock ownership plans, individual retirement accounts (IRA, 
including traditional and Roth), simplified employee pensions, and savings incentive match plans for 

employees.

Savings and thrift plans. Employees may contribute a predetermined portion of earnings (usually 

pre-tax) to an individual account. Employers may match a fixed percentage of employee 

contributions or a percentage that varies by length of service, amount of employee contribution, or 

other factors. Contributions are invested as directed by the employee or employer. Although usually 

designed as a long-term savings vehicle, savings and thrift plans may allow withdrawals and loans 

before retirement.

Money purchase pension plans. Fixed employer contributions, typically calculated as a percentage of 

employee earnings, are allocated to individual employee accounts each year. Employers also may 

make profit-sharing contributions to these plans at their discretion.

Deferred profit-sharing plans. The employer contributes a fixed or discretionary amount of company 

profits to employees' accounts. The employer contribution is based on the profits of the company 

and may be zero. The contributions may be spread equally among all employees or may be based 

on the employee salary. Unlike a savings and thrift plan, a deferred profit-sharing plan does not 

require employees to contribute to their account in order to receive the employer's benefit.

Employee stock ownership plans (ESOPs). The employer pays a designated amount, often borrowed, 

into a fund that is then invested, primarily in company stock. Any debt incurred in the purchase of 

the stock is repaid by the company. Stock is then distributed to employees according to a formula. 

(Available in private industry only.)

Individual retirement accounts (IRAs). An IRA is a retirement savings plan. There are several types 

of IRAs: traditional IRAs, Roth IRAs, simplified employee pension (SEP) IRAs, and savings incentive 

match plans for employees (SIMPLE) IRAs.

Traditional and Roth IRAs are established by individuals who are allowed to contribute earnings up 

to a set maximum dollar amount. SEPs and SIMPLE are retirement plans established by employers.

Simplified employee pensions (SEPs). An individual retirement account (IRA) is established for each 

eligible employee at local financial institutions. The employee is immediately vested in employer 

contributions and generally directs the investment of the money. Employers have flexibility in the 

amount they contribute as long as the total of employer and employee contributions do not exceed 

the annual limit set by the Internal Revenue Service (IRS) or 25% of total employee compensation, 

whichever is less.

Savings incentive match plans for employees (SIMPLE). This type of plan is limited to employers 

with fewer than 100 employees and who also do not have any other qualified retirement plan. 

SIMPLE can be either part of a 401(k) plan or established as IRAs. Employers must either make 

matching contributions of up to 3 percent of compensation or make a 2 percent nonelective 

contribution to all eligible employees. Participants who are 50 years or older may make additional 

pre-tax employee contributions into a SIMPLE.

Methods of contributions

Methods of contributions can include employee or employer contributions, detailed below.
Employee contribution methods

Pre-tax contributions. This type of contribution is a feature of many savings and thrift plans and 

other defined contribution plans that allow employees to make contributions to deferred 

compensation plans through salary reduction agreements before federal and state taxes are 

deducted from pay. Distributions from a plan funded by pre-tax contributions are taxable at 

distribution. 

Post-tax contributions. This type of contribution combines features of a Roth IRA plan and a 401(k) 

or 403(b) plan. Under these plans, employees are allowed to make part or all of their retirement 

plan contributions after taxes have been deducted, similar to the way a Roth IRA plan works. Posttax contributions and their earnings are not subject to income tax upon distribution.

Amounts up to Internal Revenue Code (IRC) limit. The IRC provides for dollar limitations on benefits 

and contributions under qualified defined contribution plans. The IRC limit on employee 

contributions was $20,500 in 2022, $19,500 in 2021 and 2020, and was $19,000 in 2019. To see a 

historical list of IRC limits, see the Internal Revenue Service's cost-of-living adjustments for 

retirement items PDF. 

Employer contribution methods

Methods employers may use for contributing to defined contribution plans include specified 

matching percent, fixed percentage of profits formula, and a percentage of employee earnings.

Specified matching percent. This feature is common in savings and thrift plans. The employer 

matches a specified percentage of employee contributions. The matching percentage can vary by 

length of service, amount of employee contribution, and other factors.For example, the employer 

will specify a percentage match of 50% up to a maximum employee contribution of 6%.

Two-tiered matching percent. The employer matches a percentage that varies by employee 

contribution. For example, the employer will match 100% up to a maximum employee contribution 

of 3%, then will match 50% up to the next 2% of employee contribution.

Fixed percentage of profits formula (Discretionary matching). This feature appears in deferred profitsharing plans. Profit sharing plan employer contributions can be a fixed percentage of profits or 

discretionary. Profits may include those for the entire company or just those in a specific business 

unit. If the employer contributes a fixed percentage of total annual profits to the plan, it is based on 

a predetermined formula. For example, the predetermined formula could be that no matter what the 

level of profits, 5 percent of the total profit is contributed to the plan. In a different example, the 

predetermined formula could have the employer set aside a reserve amount of profits (for example, 

$1 million) and pay only a fixed percentage of any profits above this amount into the employees' 

defined contribution plan. If the employer contribution is discretionary, the contribution is not based 

on a predetermined formula. In that case, the employer must decide on the amount of the 

contribution. 

Percentage of employee earnings. The employer contributes a fixed percentage of each employee's 

earnings to his or her individual account. This feature is common in money purchase pension plans.
Automatic enrollment

Automatic enrollment is a feature of some savings and thrift plans. As soon as eligibility 

requirements are met, employees become covered under a plan, but have the right to decline 

coverage at any time. A minimum default employee contribution and default investment vehicles 

usually are set, but employees may choose to contribute a different percentage and change 

investments.

Automatic enrollment provision. Workers are automatically enrolled in the retirement plan once they 

meet eligibility requirements unless they explicitly opt out.

Automatic escalation. Employee contributions are automatically increased at a predetermined rate 

over time, raising the contribution rate as a share of earnings. Employees may choose to contribute 

a different percentage.

Default contributions. The plan specifies the initial level of employee contribution. Employees may 

elect to contribute a percentage of earnings different from the default rate.

Maximum potential match. The plan indicates the maximum percentage of employee contributions 

that are matched by the employer either by employee election or through automatic escalation. 

Once this maximum is realized the employee may elect to contribute above that limit but employer 

contributions are capped.

Investment choices

Defined contribution plans either allot or provide choice of investment options, including the 

following. 

Company stock. Employees receive equity in the company that sponsors the defined contribution 

plan.

Common stock fund. This is a professionally managed fund invested in the common stock of a 

variety of companies.

Fixed-interest securities. These securities include bonds and other nonfederal instruments that pay a 

fixed interest rate over a predetermined period.

Diversified investments. These are professionally managed funds that are invested in more than one 

type of equity or debt instrument.

Money market fund. This is a professionally managed mutual fund that invests in short-term 

Treasury bills, certificates of deposit, or corporate bonds. The fund managers sell shares to 

investors, who receive regular payments of interest.

Lifecycle fund (or target date fund). This is a balanced fund designed to become more conservative 

as the investor approaches retirement by moving from equity funds to fixed-income mutual funds.
Withdrawals, loans and transfers

Prior to retirement employees may want to use retirement funds for a variety of purposes. The IRS 

allows and plans may include provisions for accessing these funds. In some cases, there are 

stipulations of the purposes for using the funds.

Withdrawals. Prior to normal payout (usually at retirement), defined contribution plan participants 

may be allowed to withdraw all or a portion of the employer funds from their accounts.

Hardship withdrawals. Employees usually are not penalized when money is withdrawn as a result of 

a hardship, often defined as the death or illness of a family member, educational expenses, sudden 

uninsured losses, or a need to prevent eviction from one’s primary residence.

Loans. Defined contribution plans may allow participants to borrow employer funds, with interest, 

from their accounts. Loan amounts often are limited to a portion of the account balance. They 

usually have to be repaid within 5 years, but longer payment periods may apply for home purchase 

or renovation loans.

Transfers or rollovers. A direct payment of plan benefits from a defined contribution plan into an IRA 

or another employer’s plan. In a direct transfer or rollover, the employee is not taxed on the 

payment until it is withdrawn or distributed later.

Other retirement benefits

Payroll deduction IRA. This plan is established by the employer on behalf of the employee, but with 

no employer contributions. The employee can open either a traditional (tax deductible) or Roth 

(contributions are made after taxes but accumulate tax-free until retirement) plan with a financial 

institution, and the employee authorizes a payroll deduction by the employer. As long as the 

employer's involvement is minimal, the plan is not treated as an employer-sponsored retirement 

plan and it is not subject to the legal requirements of such plans.

Savings with no employer contributions. These are cash or deferred arrangement plans used to fund 

savings and retirement plans authorized by section 401(k), 403(b), or 457 of the Internal Revenue 

Code. The employees' contributions can be pre- and post-tax.