Qualified Plan Basics
Qualified retirement plans are employer-sponsored or individually established plans that meet specific IRS requirements, providing significant tax advantages for retirement savings.
What Makes a Plan "Qualified"?
A qualified plan is one that meets the requirements of IRC Section 401(a) and receives favorable tax treatment:
| Tax Advantage | Description |
|---|---|
| Employer deduction | Contributions are tax-deductible for the employer |
| Employee deferral | Employee contributions are made pre-tax (reduce taxable income) |
| Tax-deferred growth | Earnings accumulate without current taxation |
| Delayed taxation | Taxes paid only when funds are distributed |
ERISA Requirements
The Employee Retirement Income Security Act of 1974 (ERISA) established minimum standards for qualified plans:
Key ERISA Provisions
| Requirement | Purpose |
|---|---|
| Participation | Rules for when employees become eligible |
| Vesting | Schedule for employee ownership of employer contributions |
| Funding | Minimum funding standards for defined benefit plans |
| Fiduciary | Standards for those managing plan assets |
| Reporting | Annual Form 5500 filing requirements |
| Disclosure | Summary Plan Description (SPD) for participants |
Participation Requirements
Plans must allow participation by employees who:
- Are at least age 21
- Have completed 1 year of service (1,000 hours in 12 months)
- 401(k) plans may use a 2-year requirement if 100% immediate vesting
Exam Tip: Plans can be more generous (earlier participation) but cannot be more restrictive than these minimum requirements.
Vesting Schedules
Vesting determines when employees gain non-forfeitable rights to employer contributions:
Cliff Vesting
| Years of Service | Vested Percentage |
|---|---|
| 0-2 years | 0% |
| 3 years or more | 100% |
Graded Vesting (6-Year)
| Years of Service | Vested Percentage |
|---|---|
| Less than 2 years | 0% |
| 2 years | 20% |
| 3 years | 40% |
| 4 years | 60% |
| 5 years | 80% |
| 6 years or more | 100% |
Special Vesting Rules
| Situation | Vesting Requirement |
|---|---|
| Employee's own contributions | Always 100% vested |
| Employer matching (DC plans) | 3-year cliff OR 6-year graded |
| Employer profit-sharing | 3-year cliff OR 6-year graded |
| Top-heavy plans | 3-year cliff OR 6-year graded |
Non-Discrimination Rules
Qualified plans cannot discriminate in favor of Highly Compensated Employees (HCEs):
Who is an HCE? (2025)
An employee is highly compensated if they:
- Own more than 5% of the company, OR
- Earned more than $160,000 in the prior year (and is in the top 20% if employer elects)
Types of Non-Discrimination Testing
| Test | Purpose |
|---|---|
| Coverage test | Ensure sufficient non-HCE coverage |
| ADP/ACP test | Limit HCE deferrals relative to non-HCEs |
| Top-heavy test | Ensure benefits don't favor key employees |
Contribution Limits (2025)
| Limit Type | 2025 Amount |
|---|---|
| Employee elective deferral (401(k), 403(b)) | $23,500 |
| Catch-up contribution (age 50+) | $7,500 |
| New enhanced catch-up (ages 60-63) | $11,250 |
| Total annual additions (employer + employee) | $70,000 |
| Defined benefit annual limit | $280,000 |
| Compensation limit for calculations | $350,000 |
2025 Update: A new "super catch-up" contribution of $11,250 is available for participants ages 60-63.
Top-Heavy Rules
A plan is top-heavy if more than 60% of plan assets or accrued benefits belong to key employees:
Key Employee Definition
- Officers earning more than $230,000 (2025)
- 5% owners
- 1% owners earning more than $150,000
Top-Heavy Requirements
| Requirement | Description |
|---|---|
| Minimum contribution | 3% of compensation for non-key employees |
| Accelerated vesting | 3-year cliff OR 6-year graded |
Fiduciary Responsibilities
Fiduciaries are held to strict standards under ERISA:
Fiduciary Duties
- Duty of Loyalty - Act solely in participants' interest
- Duty of Prudence - Act with care, skill, and diligence
- Diversification - Diversify investments to minimize risk
- Follow Plan Documents - Operate per written plan terms
Who is a Fiduciary?
| Role | Fiduciary Status |
|---|---|
| Plan trustee | Yes |
| Investment advisor | Yes (if discretionary) |
| Plan administrator | Yes |
| Employer (plan sponsor) | Yes, for certain functions |
| Insurance company selling to plan | Generally no |
Prohibited Transactions
Fiduciaries cannot engage in certain transactions:
| Transaction | Prohibition |
|---|---|
| Self-dealing | Using plan assets for own benefit |
| Party-in-interest transactions | Transactions with certain related parties |
| Kickbacks | Receiving payment for using vendors |
| Investing in employer stock | Limited to 10% for most defined benefit plans |
Exemptions
Some prohibited transactions have exemptions:
- Participant loans (if plan allows)
- Reasonable compensation for services
- Certain bank and insurance transactions
What is the maximum employee elective deferral for a 401(k) plan in 2025 for an employee under age 50?
Under ERISA, which vesting schedule allows an employee to be 0% vested for 2 years and then 100% vested at year 3?
A plan is considered "top-heavy" when what percentage of assets belong to key employees?
19.2 Types of Qualified Plans
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