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 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.

Defined Benefit or Defined Contribution?

Before learning any individual plan, sort it into one of two families. The name tells you what the plan promises, and that determines who carries the investment risk.

Defined benefit plan:

• The plan promises a stated benefit at retirement, usually from a formula based on salary and years of service
• The employer bears the investment risk. If the investments fall short, the employer must still fund the promise
• Contributions are actuarially determined rather than chosen by the participant
• The traditional pension is the classic example

Defined contribution plan:

• The plan defines the contribution going in. The retirement benefit is simply whatever the account is worth at retirement
• The participant bears the investment risk
• The 401(k), 403(b), profit-sharing plan, SEP, and SIMPLE are all defined contribution plans

Think of it this way: In a defined benefit plan, the employer promises the ending number. In a defined contribution plan, the employer promises the starting number. Whoever promises the ending number is the one who has to make up a shortfall.

Exam Tip: Gotchas

• Who bears the investment risk is the tested distinction. Defined benefit means employer risk; defined contribution means participant risk. A question describing an employee whose retirement income depends on market performance is describing a defined contribution plan.

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 (a vesting schedule may apply)
• 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:

Distribution rules:

• Early withdrawal penalty: 10% before age 59 1/2 (with exceptions, including the separation-from-service exception below)
• Separation-from-service exception (the "Rule of 55"): a participant who separates from that employer in or after the year they turn 55 can take distributions from that employer's plan with no 10% penalty
• The exception removes only the penalty; ordinary income tax still applies to a traditional 401(k) distribution. It belongs to the plan the participant just left, not to an IRA or a prior employer's plan
• 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)
• A qualified Roth 401(k) distribution requires the plan's five-taxable-year period starting with the first designated Roth contribution and a qualifying event such as age 59 1/2, death, or disability. Before qualification, a distribution is generally split pro rata between nontaxable contributions and taxable earnings
• 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.
• The Rule of 55 waives the penalty, not the tax, and only on the plan the participant just left. A rollover to an IRA or a job change before age 55 forfeits the exception on those funds.

How Does a 403(b) Plan Differ From a 401(k)?

A 403(b) plan, also called a tax-sheltered annuity (TSA), is the public-sector and nonprofit equivalent of a 401(k). An exam question can use either name.

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):

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.
• Who sponsors a 403(b) decides ERISA coverage. A governmental 403(b), such as a public school's, or a church plan is exempt whatever its funding. A private nonprofit's 403(b) is generally subject to ERISA, though one funded only by employee deferrals with limited employer involvement can fall outside it.

What Is a SEP?

A SEP (Simplified Employee Pension) is an employer-funded plan built on IRAs. It is popular with the self-employed and with small employers because it is simple to establish and the employer can vary or skip the contribution from year to year.

How it works:

• Only the employer contributes. A current SEP takes no employee elective deferrals
• The employer contributes to a SEP-IRA established for each eligible employee
• Contributions must be nonforfeitable, so the employee is immediately 100% vested
• The employee owns the SEP-IRA, and normal IRA distribution rules apply to it

Exam Tip: Gotchas

• A SEP has no employee salary deferrals. If a question describes an employee choosing to defer part of their paycheck, it is not describing a SEP.

What Is a SIMPLE IRA?

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a small-employer plan that does take employee deferrals, and that requires the employer to contribute as well.

Who can offer one:

• An eligible employer, which the statute defines as one with no more than 100 employees who received at least $5,000 of compensation in the preceding year

How it works:

• The employee makes salary-reduction contributions. The 2026 elective deferral limit is $17,000 (a higher $18,100 limit applies to certain plans)
• The employer must contribute, and chooses one of two routes each year:
  • a dollar-for-dollar match up to 3% of compensation (reducible to as low as 1% in a limited number of years), or
  • a 2% nonelective contribution for every eligible employee, whether or not that employee defers
• Contributions are nonforfeitable, so the employee is immediately 100% vested
• A two-year period runs from the date the employee first participated in any of the employer's SIMPLE plans. Within it, rollovers are restricted to another SIMPLE account, and an early distribution carries a penalty higher than the ordinary 10%

Exam Tip: Gotchas

• SEP is employer-funded only; SIMPLE takes employee deferrals plus a mandatory employer contribution. Both vest immediately, which is the contrast with a 401(k), where employer money can sit on a vesting schedule.
• The SIMPLE two-year clock starts when the employee first participates in the employer's SIMPLE plan, not at each new contribution and not at the plan's start date.

What Should You Check on Exam Day?

• Defined benefit promises the benefit and puts the investment risk on the employer; defined contribution fixes the contribution and puts the risk on the participant. The 401(k), 403(b), profit-sharing plan, SEP, and SIMPLE are all defined contribution
• A SEP is employer-funded only; a SIMPLE takes employee deferrals ($17,000 in 2026) and requires a 3% match or a 2% nonelective contribution, is capped at 100 employees, and vests immediately
• 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 401(k) deferral limits and holds only mutual funds and annuity contracts; ERISA covers a private nonprofit's 403(b) generally, not a public school's, though a deferral-only plan with limited employer involvement can fall outside it
• Traditional RMDs begin at 73 (75 if born 1960+), with a still-working exception for a non-5%-owner; Roth 401(k) has none. The Rule of 55 removes the 10% penalty, not the tax, on the plan just left