Key Takeaways
- Defined benefit plans promise a specific benefit and place investment risk on the employer.
- Defined contribution plans promise contributions; retirement benefits depend on contributions and returns.
- 401(k) plans allow salary deferrals with employer matches; safe harbor designs bypass ADP/ACP tests.
- 403(b) plans serve schools and nonprofits and allow a 15-year service catch-up.
- 457(b) plans have separate limits and special catch-up rules for government and nonprofit employees.
- Profit-sharing and money purchase plans differ in contribution flexibility but share $70,000 limits.
- SEP and SIMPLE plans are small-employer options with simplified administration and specific limits.
Last updated: December 2025
Types of Qualified Plans
Qualified retirement plans fall into two main categories: defined benefit plans and defined contribution plans. Understanding the differences is essential for the exam.
Defined Benefit vs. Defined Contribution
| Feature | Defined Benefit (DB) | Defined Contribution (DC) |
|---|---|---|
| Promise | Specific retirement benefit | Contribution amount only |
| Investment risk | Employer bears risk | Employee bears risk |
| Benefit at retirement | Predetermined formula | Depends on contributions + earnings |
| Funding | Employer must fund actuarially | Employer contributes fixed amount |
| PBGC coverage | Yes (pension insurance) | No |
| Common types | Traditional pension | 401(k), profit-sharing |
Defined Benefit Plans
Defined benefit plans promise a specific benefit at retirement, typically based on a formula:
Common Benefit Formulas
| Formula Type | Example |
|---|---|
| Flat benefit | $50/month × years of service |
| Career average | 2% × career average salary × years of service |
| Final average | 1.5% × final 5-year average salary × years of service |
Key Characteristics
- Employer assumes all investment risk
- Employer must fund plan to pay promised benefits
- Complex actuarial calculations required
- Protected by PBGC up to limits ($90,432/year in 2025 for age 65)
- Becoming less common in private sector
401(k) Plans
The most common qualified plan for private employers:
401(k) Features (2025)
| Feature | Details |
|---|---|
| Employee contribution | Pre-tax salary deferral up to $23,500 |
| Catch-up (50+) | Additional $7,500 |
| Enhanced catch-up (60-63) | Additional $11,250 |
| Employer match | Discretionary (e.g., 50% of first 6%) |
| Profit-sharing | Additional employer contributions |
| Total limit (all sources) | $70,000 (or $77,500 with catch-up) |
Types of 401(k) Plans
| Type | Description |
|---|---|
| Traditional 401(k) | Pre-tax contributions, taxable distributions |
| Roth 401(k) | After-tax contributions, tax-free distributions |
| Safe Harbor 401(k) | Automatic ADP/ACP test passing with specific contributions |
| SIMPLE 401(k) | Simplified version for small employers |
| Solo 401(k) | For self-employed with no employees |
Safe Harbor 401(k)
Employers can bypass non-discrimination testing by providing:
| Safe Harbor Option | Employer Contribution |
|---|---|
| Basic match | 100% of first 3% + 50% of next 2% |
| Enhanced match | 100% of first 4% |
| Non-elective | 3% of compensation for all eligible employees |
403(b) Plans (Tax-Sheltered Annuities)
For employees of:
- Public schools (K-12 and universities)
- 501(c)(3) tax-exempt organizations (nonprofits)
- Churches and certain ministers
403(b) Contribution Limits (2025)
| Limit | Amount |
|---|---|
| Elective deferral | $23,500 |
| Age 50+ catch-up | $7,500 |
| 15-year service catch-up | Up to $3,000 additional |
| Total additions limit | $70,000 |
Special Rule: Employees with 15+ years of service may have additional catch-up beyond the age 50 catch-up.
403(b) Investments
| Investment Type | Availability |
|---|---|
| Annuities (fixed and variable) | Yes |
| Mutual fund custodial accounts | Yes |
| Collective trust accounts | Only for churches |
457(b) Deferred Compensation Plans
For employees of:
- State and local governments
- Tax-exempt organizations (limited)
457(b) Key Features
| Feature | Details |
|---|---|
| Contribution limit (2025) | $23,500 |
| Age 50+ catch-up | $7,500 (OR special catch-up, not both) |
| Special catch-up | Double limit ($47,000) in final 3 years before normal retirement age |
| Coordination with 401(k)/403(b) | Separate limit - can max out both |
Exam Tip: 457(b) plans have a SEPARATE contribution limit from 401(k) and 403(b). An employee could contribute $23,500 to their 401(k) AND $23,500 to their 457(b) in the same year.
457(b) vs. 457(f)
| Feature | 457(b) | 457(f) |
|---|---|---|
| Contribution limit | $23,500 | None |
| Assets | Held in trust | Employer's general assets |
| Risk | Protected | Subject to employer's creditors |
| Taxation | At distribution | At vesting (substantial risk of forfeiture) |
Profit-Sharing Plans
Employer contributions are discretionary and based on company profits:
| Feature | Details |
|---|---|
| Contribution | Up to 25% of covered payroll |
| Per-participant limit | $70,000 (2025) |
| Flexibility | Employer decides amount each year |
| Vesting | Subject to 3-year cliff or 6-year graded |
Money Purchase Plans
Similar to profit-sharing, but contributions are mandatory:
| Feature | Details |
|---|---|
| Contribution | Fixed percentage specified in plan |
| Per-participant limit | $70,000 (2025) |
| Employer commitment | Must contribute even in bad years |
| Common percentage | Often combined with profit-sharing |
SEP-IRAs (Simplified Employee Pension)
For small employers and self-employed:
SEP Features (2025)
| Feature | Details |
|---|---|
| Contribution limit | Lesser of 25% of compensation or $70,000 |
| Self-employed calculation | 20% of net self-employment income |
| Employee eligibility | Age 21, 3 of last 5 years of service, $750 compensation |
| Administration | Minimal paperwork |
| Employer-only contributions | Employees cannot defer salary |
SEP Advantages
- Easy to establish and maintain
- Flexible contributions (can vary year to year)
- No annual Form 5500 filing
- Contributions can be made until tax filing deadline
SIMPLE Plans
Savings Incentive Match Plan for Employees for employers with 100 or fewer employees:
SIMPLE IRA Contribution Limits (2025)
| Limit | Amount |
|---|---|
| Employee deferral | $16,500 |
| Age 50+ catch-up | $3,500 |
| Enhanced catch-up (60-63) | $5,250 |
Employer Contribution Options
| Option | Requirement |
|---|---|
| Matching | Dollar-for-dollar up to 3% of compensation |
| Non-elective | 2% of compensation for all eligible employees |
SIMPLE Restrictions
- Cannot maintain another qualified plan
- Cannot be used if more than 100 employees
- 25% penalty for withdrawals within first 2 years
Key Takeaways
- Defined benefit plans promise a specific benefit and place investment risk on the employer.
- Defined contribution plans promise contributions; retirement benefits depend on contributions and returns.
- 401(k) plans allow salary deferrals with employer matches; safe harbor designs bypass ADP/ACP tests.
- 403(b) plans serve schools and nonprofits and allow a 15-year service catch-up.
- 457(b) plans have separate limits and special catch-up rules for government and nonprofit employees.
- Profit-sharing and money purchase plans differ in contribution flexibility but share $70,000 limits.
- SEP and SIMPLE plans are small-employer options with simplified administration and specific limits.
Loading diagram...
Loading diagram...
Test Your Knowledge
Which type of retirement plan is characterized by the employer bearing all investment risk and promising a specific benefit at retirement?
A
B
C
D
Test Your Knowledge
A public school teacher has access to which type of qualified retirement plan?
A
B
C
D
Test Your Knowledge
What is unique about 457(b) plan contribution limits compared to 401(k) and 403(b) plans?
A
B
C
D