Qualified retirement plan

A qualified retirement plan is an employer-sponsored retirement plan that satisfies the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA). In exchange for meeting those standards, the plan receives favorable tax treatment: employer contributions are deductible, employee contributions are typically made pre-tax, and investment earnings grow tax-deferred until money is withdrawn.

Qualified plans come in two broad types. Defined benefit plans promise a specific payout at retirement, calculated from factors like salary and years of service. Defined contribution plans — such as 401(k)s, profit-sharing plans, and Keogh (HR-10) plans for self-employed individuals — specify what goes in, with the eventual benefit depending on investment performance. To stay qualified, a plan must be nondiscriminatory, covering rank-and-file employees rather than favoring only owners and executives, and must follow vesting, funding, and disclosure rules.

The qualified label matters because of what sits on the other side of the line. Nonqualified plans, such as deferred compensation arrangements, can discriminate in favor of key employees but give up the upfront tax deduction. Traditional IRAs share similar tax treatment — deductible contributions and tax-deferred growth — but because they are individual accounts rather than employer plans covered by ERISA, they are technically not qualified plans.

Retirement plan taxation is heavily tested on the life and health insurance licensing exams as well as the Series 7 and Series 66. Expect questions on which plans are qualified, how distributions are taxed as ordinary income, and the penalties that generally apply to early withdrawals.