Qualified Retirement Plans

Qualified plans must meet requirements of Internal Revenue Code (IRC) Section 401(a) and receive IRS approval. They benefit from tax-deductible employer contributions, tax-deferred growth, and creditor protection under the Employee Retirement Income Security Act (ERISA). They must not discriminate in favor of highly compensated employees (nondiscrimination testing).

Vesting Schedules

Vesting schedules determine how employees earn ownership of employer contributions over time:

• Cliff vesting: 0% until a set date, then 100% (max 3 years for employer match)
• Graded vesting: Gradual increase (e.g., 20% per year over 6 years; max 6-year schedule)
• Employee's own contributions are always 100% immediately vested

Defined Benefit vs Defined Contribution

Think of it this way: In a defined benefit plan, the employer promises a specific monthly check at retirement; if the investments perform poorly, the employer makes up the difference. In a defined contribution plan, the employer promises a specific contribution today; whatever that money grows to (or shrinks to) is what you get.

Exam Tip: Gotchas

• Defined benefit = employer bears investment risk, PBGC insured. Defined contribution = employee bears investment risk, no PBGC. This distinction appears frequently on the exam.

Defined Benefit Plans

• Employer promises a specific retirement benefit (e.g., percentage of final salary times years of service)
• Employer bears the investment risk - must fund enough to pay promised benefits
• Actuaries determine required employer contributions each year
• Pension Benefit Guaranty Corporation (PBGC) insures defined benefit plans (employer pays premiums)
• Maximum annual benefit (2026): $290,000 or 100% of average compensation for highest 3 consecutive years
• Benefits are typically based on: years of service, final average salary, benefit formula
• Less common today; being replaced by defined contribution plans

Defined Contribution Plans

• Employer and/or employee contribute to individual accounts; retirement benefit depends on contributions + investment performance
• Employee bears the investment risk (account value fluctuates with market)
• No guaranteed benefit amount at retirement
• Maximum combined contribution (2026): $72,000 (employer + employee, excluding catch-up)
• Includes: 401(k), 403(b), 457, profit-sharing, money purchase pension

401(k) Plans

• Most common employer-sponsored defined contribution plan
• Employee deferral limit (2026): $24,500 (under 50); catch-up contributions for 50+
• Employer match: Common but not required; often 50% or 100% of deferrals up to a percentage of salary
• Employer contributions are subject to vesting schedules; employee deferrals are always 100% vested
• Loans permitted from 401(k) (up to $50,000 or 50% of vested balance)
• Hardship withdrawals available under specific circumstances (still subject to income tax; 10% penalty may apply if under 59.5)
• Roth 401(k): After-tax contributions within the plan; qualified distributions are tax-free

403(b) Plans (Tax-Sheltered Annuities)

• Available to employees of public schools, 501(c)(3) tax-exempt organizations, and religious organizations
• Contribution limits are the same as 401(k): $24,500 (2026); same catch-up rules apply
• Investments typically limited to mutual funds and annuity contracts
• May have an additional 15-year service catch-up (up to $3,000/year extra for employees with 15+ years of service, lifetime max $15,000)

Exam Tip: Gotchas

• 403(b) has a 15-year service catch-up that 401(k) does not. Up to $3,000/year extra, $15,000 lifetime max. This is separate from age-based catch-ups.

457(b) Plans (Deferred Compensation)

• Available to employees of state and local governments and certain tax-exempt organizations
• Contribution limit (2026): $24,500 (same as 401(k)/403(b))
• No 10% early withdrawal penalty regardless of age at distribution (unique among retirement plans)
• Governmental 457(b) plans allow rollovers to IRAs and other qualified plans
• Special 3-year catch-up: In the 3 years before normal retirement age, employees may defer up to double the annual limit ($49,000 in 2026) - cannot combine with age 50+ catch-up
• Non-governmental 457(b) assets are NOT protected from employer's creditors (unfunded promise to pay)

Exam Tip: Gotchas

• 457(b) plans have NO 10% early withdrawal penalty. If an employee separates from service at any age and takes a distribution from a governmental 457(b), there is no early withdrawal penalty (income tax still applies). This is different from 401(k) and 403(b), which impose the 10% penalty before age 59.5.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

• Designed for small employers with 100 or fewer employees who earned at least $5,000
• Both employer and employee contribute
• Employee deferral limit (2026): $17,000 (under 50); $21,000 (age 50+, with $4,000 catch-up). Plans of employers that elect the 10% increase under SECURE 2.0 use $18,100 / $22,100.
• Employer contribution - must provide EITHER:
  • Dollar-for-dollar match up to 3% of employee compensation, OR
  • 2% nonelective contribution for all eligible employees (regardless of whether they contribute)
• Contributions are immediately 100% vested
• 25% early withdrawal penalty if distribution taken within first 2 years of participation (instead of the normal 10%)
• After 2 years, standard 10% early withdrawal penalty applies (if under 59.5)

Exam Tip: Gotchas

• SIMPLE IRAs have a HIGHER early withdrawal penalty (25% instead of 10%) during the first 2 years of participation. This is a unique and heavily tested rule. After 2 years, the standard 10% applies.

SEP IRA (Simplified Employee Pension)

• Employer-funded IRA for small businesses and self-employed individuals
• Only the employer contributes (employees cannot make elective deferrals)
• Contribution limit (2026): 25% of employee compensation, up to $72,000
• Must cover all eligible employees: age 21+, worked for employer in 3 of last 5 years, earned at least $750
• Contributions are immediately 100% vested
• Easy to establish and maintain (minimal paperwork vs. 401(k))
• No annual Form 5500 filing – employer keeps Form 5305-SEP on file instead, so SEP IRAs stay simple for tiny practices
• Can be established and funded up to the employer's tax-filing deadline (with extensions) for the year, giving high-income professionals flexibility once cash flow is known
• Employer contributions must be a uniform percentage of compensation for all eligible employees

Exam Tip: Gotchas

• SEP IRA = employer-only contributions. No employee deferrals, no catch-up contributions. Often confused with SIMPLE IRA, which allows both.

Employer Plan Comparison

SECURE Act 2.0 Key Provisions

• Required Minimum Distribution (RMD) age increase: Age 73 (2023); age 75 (2033, for those born 1960+)
• Reduced RMD penalty: 25% (down from 50%); further reduced to 10% if corrected within 2 years
• Roth employer plan accounts: No RMDs for Roth 401(k), 403(b), and governmental 457(b) starting in 2024
• Super catch-up (ages 60-63): Higher catch-up contribution limit ($11,250 in 2026)
• Roth catch-up mandate: Employees earning over $150,000 must make catch-up contributions as Roth (effective 2026)
• Student loan match: Employers may treat student loan payments as elective deferrals for matching purposes
• Emergency savings: Employers may offer emergency savings accounts linked to retirement plans (up to $2,500)
• Roth SIMPLE and SEP: Allows Roth contributions to SIMPLE and SEP IRAs

Exam Tip: Gotchas

• Roth 401(k) accounts previously required RMDs (unlike Roth IRAs). SECURE Act 2.0 ELIMINATED RMDs for Roth accounts in employer plans, effective 2024. Now Roth 401(k), Roth 403(b), and Roth governmental 457(b) accounts are treated the same as Roth IRAs for RMD purposes.