Quick Answer
Qualified retirement plans, such as 401(k) and 403(b) plans, meet the Internal Revenue Code's qualification requirements in exchange for an employer tax deduction, tax-deferred growth, and Employee Retirement Income Security Act (ERISA) protection. In return, employers must follow strict eligibility, nondiscrimination, and vesting rules that cover eligible employees broadly, not just favored ones.
With individual plans covered, it is time to look at employer-sponsored qualified retirement plans. These are the largest category of retirement savings vehicles, covering millions of employees through the 401(k) and 403(b) structures.
What Makes a Plan "Qualified"?
A qualified retirement plan meets the qualified-plan requirements set out in the Internal Revenue Code. In exchange for following IRS rules, these plans receive favorable tax treatment:
- Employer contributions are tax-deductible for the employer
- Earnings grow tax-deferred for the employee
- Participants receive protection under the Employee Retirement Income Security Act (ERISA)
The tradeoff: qualified plans must follow strict rules on eligibility, nondiscrimination, vesting, and reporting. The employer cannot cherry-pick which employees to cover.
Think of it this way: "Qualified" means the plan qualifies for tax breaks by meeting government rules. The IRS gives employers a deal: your contributions are tax-deductible and your employees' money grows tax-deferred, but you have to play fair and offer the plan broadly.
How Does a 401(k) Plan Work?
The 401(k) is the most common employer-sponsored defined contribution plan.
How it works:
- Employees make elective deferrals from their paycheck (pre-tax or Roth)
- Employers may match a portion of employee contributions (subject to a vesting schedule)
- Both employee and employer contributions go into the employee's individual account
- The employee directs how the money is invested (typically among a menu of mutual funds)
Contribution limits (2026):
- Employee elective deferrals: $24,500 ($32,500 if age 50+; $35,750 if age 60-63)
- Total contributions (employee + employer): $72,000 ($80,000 if age 50+; $83,250 if age 60-63)
Tax treatment:
| Contribution Type | Tax at Contribution | Growth | Tax at Distribution |
|---|---|---|---|
| Traditional 401(k) | Pre-tax (reduces current taxable income) | Tax-deferred | Ordinary income |
| Roth 401(k) | After-tax (no current deduction) | Tax-free | Tax-free (if qualified) |
Distribution rules:
- Early withdrawal penalty: 10% before age 59 1/2 (with exceptions)
- Required Minimum Distributions (RMDs) begin at age 73 (age 75 for those born in 1960 or later); a non-5%-owner still working past that age may delay RMDs until retirement if the plan allows it (the "still-working exception," not available for IRAs)
- Designated Roth 401(k) accounts: no RMDs (SECURE 2.0)
- Loans permitted from the plan
ERISA requirements:
- Generally subject to ERISA (with limited exceptions for governmental and church plans), which imposes fiduciary duties, reporting requirements, and participant protections
- Must follow nondiscrimination rules (cannot favor highly compensated employees)
Exam Tip: Gotchas
- Roth 401(k) contributions are after-tax, but qualified distributions are entirely tax-free (both contributions AND earnings). The tradeoff: no upfront tax deduction.
- The elective deferral limit ($24,500) and the total contribution limit ($72,000) are separate caps. The total limit includes employer matching and profit-sharing contributions on top of the employee's deferral.
- 401(k) plans allow participant loans; IRAs do not. A loan from an IRA is treated as a taxable distribution.
How Does a 403(b) Plan Differ From a 401(k)?
A 403(b) plan is the public-sector and nonprofit equivalent of a 401(k).
Who can offer a 403(b):
- Public schools and educational institutions
- Tax-exempt 501(c)(3) charitable organizations
- Certain ministers
Similarities to 401(k):
- Employee elective deferrals (pre-tax or Roth)
- Same deferral limits: $24,500 ($32,500 if 50+; $35,750 if age 60-63) for 2026
- Potential employer contributions
- 10% early withdrawal penalty before age 59 1/2
- RMDs starting at age 73 (75 for those born in 1960 or later); a non-5%-owner still working past that age may delay RMDs until retirement if the plan allows it (the "still-working exception," not available for IRAs)
Key differences from 401(k):
| Feature | 401(k) | 403(b) |
|---|---|---|
| Eligible employers | Private-sector companies | Public schools, 501(c)(3) nonprofits, ministers |
| Investment options | Broad (stocks, bonds, mutual funds, etc.) | Limited to mutual funds and annuity contracts |
| ERISA applicability | Generally subject to ERISA (except governmental/church plans) | Subject to ERISA only if the employer makes contributions |
Exam Tip: Gotchas
- 403(b) plans can only invest in mutual funds and annuity contracts. They cannot hold individual stocks, bonds, ETFs, or other securities directly.
- A 403(b) is only subject to ERISA when the employer contributes. An employee-only 403(b) may be exempt from ERISA oversight.
What Should You Check on Exam Day?
- 401(k)/403(b) employee elective deferral: $24,500 in 2026 ($32,500 age 50+; $35,750 age 60-63); total contribution cap (employee + employer): $72,000 ($80,000 age 50+; $83,250 age 60-63)
- 403(b) shares the same deferral limits as a 401(k) but restricts investments to mutual funds and annuity contracts
- Both plans' traditional accounts have RMDs starting at age 73 (75 for those born 1960+), with a still-working exception for a non-5%-owner in either plan; designated Roth accounts in either plan (Roth 401(k) or Roth 403(b)) have none
- A 401(k) is generally subject to ERISA (governmental and church plans are exceptions); a 403(b) is subject to ERISA only if the employer contributes
- Both plans permit participant loans and apply a 10% early withdrawal penalty before age 59 1/2
- Nondiscrimination rules bar qualified plans from favoring highly compensated employees, unlike nonqualified plans