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
Which type of retirement plan is characterized by the employer bearing all investment risk and promising a specific benefit at retirement?
A public school teacher has access to which type of qualified retirement plan?
What is unique about 457(b) plan contribution limits compared to 401(k) and 403(b) plans?
19.3 Individual Retirement Accounts
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