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Qualified Retirement Plan: Definition and 2 Main Types

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Updated July 11, 2024

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What Is a Qualified Retirement Plan?

A qualified retirement plan is an employer-sponsored retirement plan that meets the requirements of the Internal Revenue Code (IRC) and the 澳洲幸运5开奖号码历史𓄧查询:Employee Retirementཧ Income Security Act (ERISA), making it eligible for certain tax benefits. These can include tax deductions for employer and employee contributions and 澳洲幸运5开奖号码历史查询:tax deferral of investment gains.

Key Takeaways

A qualified retirement plan is an employer-sponsored plan that meets Internal Revenue Service (IRS) and U.S. Labor Department requirements and offers certain tax benefits to employees and employers.
Those benefits can include tax deductions for contributions and tax deferral of investment gains until the money is withdrawn from the account.
Qualified retirement plans can be either defined benefit or defined contribution plans.
Examples of qualified retirement plans include traditional pensions, 401(k) plans, and profit-sharing plans.

Understanding Qualified Retirement Plans

Qualified retirement plans come in two main types: 澳洲幸运5开奖号码历史查询:defined benefit and 澳洲幸运5开奖号码历史查询:defined contribution.

There are also some other plans that are hybrids of the two, such as a 澳洲幸运5开奖号码历史查询:cash balance plan.

Defined-benefit plans give employees a guaranteed payout after retirement and place the risk on the employer to save and invest properly to meet plan 澳洲幸运5开奖号码历史查询:liabilities. A traditional, annuity-type pension is an example of a defined-benefit plan.

With defined-contribution plans, the amount of money that employees will have available to them in retirement depends on how much they contribute and how successfully they invest those contributions. The employee typically chooses what to invest in and bears all of the investment risk. A 401(k) is the most popular examplꦡe of a defined contribution plan.

Other examples of qualified plans include:

Requirements for Qualified Retirement Plans

The tax code lays out a long list of rღequirements that plans must meet to be qualified.

For example, employees must be eligible to participate in the plan no later than the date when they turn 21 years old or the date when they complete one year of service, whichever comes later.

Once they are eligible to participate, employees must be allowed to join the plan no later than the first day of the first plan year beginning after the date when they met the minimum age and service requirements or six months after the date when they satisfied those requirements, whichever comes earlier.

The tax code also establishes the rules for vesting, 澳洲幸运5开奖号码历史查询:employer matching contributions, 澳洲幸运5开奖号码历史查询:rollovers, 澳洲幸运5开奖号码历史查询:distributions, and more.

Fast Fact

Employers have some leeway within these rules, butꦆ once they have put the specifics of their plan in writing—as they are required to do—they must adhere to them unless they amend the plan.

Qualified retirement plans are also subject to the rules of the Employee Retirement Income Security Act of 1974 (ERISA), which is administered by the U.S. Department of Labor. One of its chief requirements is that plan sponsors (employers) and administrators act as fiduciaries, meaning that they must make investment decisions in the best interest of plan participants. If they fail to do that, they can be held personally liable to make up any losses.

Tax Benefits of Qualified Retirement Plans

Employers that provide qualified retirement plans for their employees can take a tax deduction for the money they contribute to the plans up to certain limits. Those limits depend on the type of plan, with defined-benefit plans having higher contribution limits than defined-contribution plans.

The 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) also sets limits for the 澳洲幸运5开奖号码历史查询:maximum amount of contributions an employee can make to the plan.

With traditional defined-contribution plans, employees can take a tax deduction for their contributions, reducing their taxable income and, therefore, their taxes for the year. They’ll pay tax on that income only when they later withdraw it, usually in retirement. In the meantime, the investment earnings on the money in their account will be tax-deferred, again until it’s withdrawn. (澳洲幸运5开奖号码历史查询:Roth-type accounts are an exception here—they don’t provid𝐆e any tax deduction going in, but later withdrawals will be tax and penalty-free, as long as the account owner is over age 59 ½ and has had the account for oꩵver five years.)

Depending on the specific provisions of the employer’s plan, qualified plans can also allow employees to take out loans and make penalty-free 澳洲幸运5开奖号码历史查询:hardship withdrawals under certain circumstances.

What Is a Non-Qualified Retirement Plan?

澳洲幸运5开奖号码历史查询:Non-qualified retirement plans are employer-sponsored plans that don’t meet all of the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). They don’t receive all of the tax advantages of qualified plans. Non-qualified plans are primarily used to incentivize and reward a com🍸pany’s top executives.

Are Qualified Retirement Plans Federally Insured?

Many defined-benefit plans, or traditional pensions, are insured by the federal 澳洲幸运5开奖号码历史查询:Pension Benefit Guaranty Corp. up to certain limits. Defi♐ned-contribution plans, on the otheꦰr hand, are not insured.

How Are Withdrawals from Qualified Retirement Plans Taxed?

Withdrawals, or distributions, from qualified retirement plans must be included in the taxpayer’s income for that year and are 澳洲幸运5开奖号码历史查询:taxed a𒊎t the same rate as their ordinary income, such as a salary.

As long as the account has been open for more than five years, Roth-type accounts are eligible for tax-free withdrawals. This is because the income that was used to fund the account's contributions has already been taxed.

The Bottom Line

Qualified retirement plans are employer-sponsored plans that meet the requirements of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA) and are eligible for certain tax benefits, such as tax deductions for contributions and tax𝓡 deferral of investment gains. Qualified retirement plans can be either defined benefit or defined contribution plans.

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