Qualified Retirement Plans

Qualified plans must meet the qualified-plan requirements under the Internal Revenue Code (IRC) 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).

How Do Vesting Schedules Work?

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

How Do Defined Benefit and Defined Contribution Plans Compare?

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.

How Does a Defined Benefit Plan Work?

• 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): the lesser of $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

How Does a Defined Contribution Plan Work?

• 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

How Does a 401(k) Plan Work?

• 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 made to the plan; qualified distributions are tax-free

How Does a 403(b) Plan Work?

• 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.

How Does a 457(b) Plan Work?

• Available to employees of state and local governments and certain tax-exempt organizations
• Contribution limit (2026): $24,500 (same as 401(k)/403(b))
• Eligible governmental 457(b) distributions generally avoid the 10% early withdrawal penalty, regardless of age, with one exception: amounts attributable to rollovers from plans or IRAs that were subject to the additional tax may remain subject to it
• 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

• Eligible governmental 457(b) distributions generally avoid the 10% early withdrawal penalty at any age (income tax still applies). This is different from 401(k) and 403(b), which impose the 10% penalty before age 59.5. Watch for the exception: amounts attributable to rollovers from plans or IRAs that were subject to the additional tax may remain subject to it.

What Should You Check on Exam Day?

• Qualified plans must meet IRC requirements and IRS approval, and must not discriminate in favor of highly compensated employees
• Defined benefit: employer bears investment risk, actuarially determined contributions, PBGC-insured, max annual benefit (2026) the lesser of $290,000 or 100% of the highest 3-year average pay
• Defined contribution: employee bears investment risk, combined max contribution (2026) $72,000 excluding catch-up, no PBGC insurance
• Cliff vesting maxes at 3 years for employer match; graded vesting maxes at a 6-year schedule; the employee's own contributions are always 100% vested
• 401(k), 403(b), and 457(b) all share the $24,500 (2026) employee deferral limit
• 403(b) adds a 15-year service catch-up (up to $3,000/year, $15,000 lifetime max) that 401(k) does not have
• Eligible governmental 457(b) distributions generally avoid the 10% early withdrawal penalty regardless of age, unlike 401(k) and 403(b), except for amounts attributable to rollovers that were subject to the additional tax