Qualified Retirement Plans

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 requirements of Internal Revenue Code (IRC) Section 401(a). 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.

401(k) Plans

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 (2025):

• Employee elective deferrals: $23,500 ($31,000 if age 50+)
• Total contributions (employee + employer): $70,000 ($77,500 if age 50+)

Tax treatment:

Distribution rules:

• Early withdrawal penalty: 10% before age 59 1/2 (with exceptions)
• Required Minimum Distributions (RMDs) begin at age 73
• Roth 401(k) accounts: no RMDs starting in 2024 (SECURE 2.0)
• Loans permitted from the plan

ERISA requirements:

• Subject to ERISA, 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 ($23,500) and the total contribution limit ($70,000) 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.

403(b) Plans (Tax-Sheltered Annuities)

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 organizations under IRC Section 501(c)(3)
• Certain ministers

Similarities to 401(k):

• Employee elective deferrals (pre-tax or Roth)
• Same deferral limits: $23,500 ($31,000 if 50+) for 2025
• Potential employer contributions
• 10% early withdrawal penalty before age 59 1/2
• RMDs starting at age 73

Key differences from 401(k):

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.