Retirement plans help employees save for the future through employer-sponsored programs. Some are qualified plans, which meet IRS rules under IRC §401(a), while others are nonqualified plans, which offer more flexibility but fewer tax advantages.
This article explains the most common types of retirement plans and how they differ.
Qualified vs. nonqualified plans
Qualified plans: Meet IRS standards, provide tax benefits, and must pass nondiscrimination testing to ensure fairness for non-highly compensated employees. Employer contributions are tax-deductible, and employee contributions/earnings are tax-deferred until distribution.
Nonqualified plans: Do not meet IRS standards. They may favor select employees, do not have contribution limits, and do not offer the same tax advantages.
401(k) plans
Employees defer a portion of salary pre-tax, often matched by employer contributions.
Annual elective deferral limit for 2025 is $23,500, with an additional $7,500 catch-up for employees age 50+.
Distributions are taxable and can occur only after a qualifying event (retirement, termination, hardship, or death).
Required minimum distributions (RMDs) begin at age 73.
Roth 401(k) plans
Follow the same eligibility, vesting, and contribution rules as traditional 401(k)s.
Contributions are made after-tax.
Qualified distributions are tax-free, including investment earnings.
Contribution limits are combined with traditional 401(k) totals.
SEP (Simplified Employee Pension)
Employer-only contributions made to a SEP-IRA for each eligible employee.
Simple administration, no annual IRS filing required.
Employees cannot make deferrals; contributions are employer-funded.
SIMPLE plans
For businesses with 100 or fewer employees.
Two options: SIMPLE IRA or SIMPLE 401(k).
Employees contribute through salary reductions; employers contribute either matching or nonelective amounts.
403(b) plans
Available to employees of public schools and certain nonprofits.
Operates like a 401(k).
Same contribution limits and catch-up rules apply.
457(b) plans
Offered by state/local governments and certain nonprofits.
Classified as nonqualified but can mirror 401(k)/403(b) limits.
May be discriminatory (can favor certain employees).
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