Qualified Pension Plan
What Does Qualified Pension Plan Mean?
A qualified pension plan is a retirement plan that meets the requirements of Internal Revenue Code Section 401 and the Employee Retirement Income Security Act of 1974 (ERISA), making participants eligible for specific tax benefits.
Established by the employer, qualified pension plans provide employers with a tax break on the contributions made for employees. These plans also allow employees to defer a portion of their salaries into the plan, thereby reducing their taxable income and lowering their income tax liability.
A qualified pension plan is also referred to as a qualified retirement plan.
Insuranceopedia Explains Qualified Pension Plan
There are two main types of qualified pension plans:
- Defined benefit
- Defined contribution
A defined benefit plan provides employees with a guaranteed payout in retirement, placing the responsibility on the employer to save and invest to meet the plan’s liabilities. A traditional annuity is an example of this type of pension plan.
In contrast, a defined contribution plan determines the amount employees receive in retirement based on their own savings and investments during their working years. A 401(k) plan is a prime example of this type of pension plan. Other examples of qualified pension plans include profit-sharing plans, 403(b) plans, money purchase plans, employee stock ownership plans, simplified employee pensions (SEP), and many others.
