# Qualified Retirement Plans: Definition, Types, and Tax Benefits

## What Is a Qualified Retirement Plan?

A qualified retirement plan is a savings plan that meets IRS and [ERISA](https://www.investopedia.com/terms/e/erisa.asp) requirements. It offers investors tax benefits like deductions and [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp) growth. There are two main types of qualified retirement plans: defined benefit plans, like traditional pensions, and defined contribution plans, such as 401(k)s. These plans are important retirement planning tools because they help people build financial security for the future.

### Key Takeaways

*   Qualified retirement plans are designed to provide tax advantages under the Internal Revenue Code, such as tax deductions on contributions and tax-deferred investment growth until funds are withdrawn.  
    
*   These plans come in two primary forms: defined benefit plans, where the employer bears the investment risk and commits to a specified payout, and defined contribution plans, where the employee assumes the investment risk.  
    
*   Compliance with the Employee Retirement Income Security Act (ERISA) is required for a plan to be considered qualified, ensuring fiduciary responsibility towards the best interest of plan participants.  
    
*   Examples of qualified retirement plans include traditional pensions, 401(k)s, and profit-sharing plans, among others, each with specific rules around contributions, vesting, and withdrawals.  
    
*   The IRS sets contribution limits for these plans, impacting how much employers and employees can benefit from tax deductions annually.  
    

## Exploring Defined Benefit and Defined Contribution Plans

Qualified retirement plans come in two main types: [defined benefit](https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp) and [defined contribution](https://www.investopedia.com/terms/d/definedcontributionplan.asp).

Some plans are hybrids of the two, like [cash balance plans](https://www.investopedia.com/terms/c/cashbalancepensionplan.asp).

Defined-benefit plans guarantee employees a [payout](https://www.investopedia.com/terms/p/payout.asp) after retirement, with employers bearing investment risk to meet [liabilities](https://www.investopedia.com/terms/l/liability.asp). A traditional, [annuity](https://www.investopedia.com/ask/answers/12/what-is-an-annuity.asp)\-type [pension](https://www.investopedia.com/terms/p/pensionplan.asp) is an example of a defined-benefit plan.

In defined-contribution plans, retirement funds depend on how much employees contribute and how well they invest. The employee typically chooses what to invest in and bears all of the investment risk. A [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) is the most popular example of a defined contribution plan.

Other examples of qualified plans include:

*   [Profit-sharing plans](https://www.investopedia.com/terms/p/profitsharingplan.asp)
*   [403(b) plans](https://www.investopedia.com/terms/1/403bplan.asp)
*   [457 plans](https://www.investopedia.com/terms/1/457plan.asp)
*   [Money purchase plans](https://www.investopedia.com/terms/m/moneypurchasepensionplan.asp)
*   [Employee stock ownership plans (ESOPs)](https://www.investopedia.com/terms/e/esop.asp)
*   [Salary Reduction Simplified Employee Pension (SARSEP) plans](https://www.investopedia.com/terms/s/sarsep.asp)
*   [Simplified Employee Pension (SEP) plans](https://www.investopedia.com/terms/s/sep.asp)
*   [Savings Incentive Match Plan for Employees (SIMPLE) plans](https://www.investopedia.com/terms/s/simple.asp)

## Key Requirements for Qualification  

The tax code lists requirements 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 eligible, employees must join the plan by the first day of the plan year after meeting age and service requirements, or six months after, whichever is earlier.

The tax code also establishes the rules for [vesting](https://www.investopedia.com/terms/v/vesting.asp), [employer matching contributions](https://www.investopedia.com/terms/m/matchingcontribution.asp), [rollovers](https://www.investopedia.com/articles/personal-finance/092214/guide-401k-and-ira-rollovers.asp), [distributions](https://www.investopedia.com/terms/d/distribution.asp), and more.

> **Fast Fact**
>
> Employers have some leeway within these rules, but 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 plans must also follow ERISA rules, managed by the U.S. Department of Labor. One of its chief requirements is that plan sponsors (employers) and administrators act as [fiduciaries](https://www.investopedia.com/terms/f/fiduciary.asp), 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.

## Financial Advantages 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 [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) also sets limits for the [maximum amount of contributions](https://www.investopedia.com/ask/answers/112415/are-catchup-contributions-included-415-limit.asp) 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. ([Roth-type accounts](https://www.investopedia.com/terms/r/roth401k.asp) are an exception here—they don’t provide 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 over 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 [hardship withdrawals](https://www.investopedia.com/retirement/relief-401k-hardship-withdrawals/) under certain circumstances.

## What Is a Non-Qualified Retirement Plan?

[Non-qualified retirement plans](https://www.investopedia.com/terms/n/non-qualified-plan.asp) 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 company’s top executives.

## Are Qualified Retirement Plans Federally Insured?

Many defined-benefit plans, or traditional pensions, are insured by the federal [Pension Benefit Guaranty Corp.](https://www.investopedia.com/terms/p/pbgc.asp) up to certain limits. Defined-contribution plans, on the other 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 [taxed at the same rate as their ordinary income](https://www.investopedia.com/terms/t/taxbracket.asp), 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](https://www.investopedia.com/terms/i/income.asp) that was used to fund the account's contributions has already been taxed.

## The Bottom Line

There are two main types of qualified retirement plans: defined benefit plans, which offer guaranteed payouts, and defined contribution plans, which depend on contributions and investment performance. These plans provide tax benefits, such as deductions on contributions and tax-deferred growth on investments. If you're unsure of your eligibility or how to manage your account, it's a good idea to consult a financial professional who can guide you through the process.

> **Article Sources**
>
> 1.  Internal Revenue Service. “[A Guide to Common Qualified Plan Requirements](https://www.irs.gov/retirement-plans/a-guide-to-common-qualified-plan-requirements).”
>     
> 2.  U.S. Department of Labor. “[Fiduciary Responsibilities](https://www.dol.gov/general/topic/retirement/fiduciaryresp).”
>     
> 3.  Internal Revenue Service. “[401(k) Plan Overview](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview).”
>     
> 4.  Internal Revenue Service. “[Publication 560: Retirement Plans for Small Business](https://www.irs.gov/pub/irs-pdf/p560.pdf),” Page 15.
>     
> 5.  Internal Revenue Service. “[Retirement Topics—Tax on Normal Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-normal-distributions).”