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Qualified retirement plans, such as 401(k)s, are employer-sponsored retirement plans that follow IRS guidelines and offer participants unique tax advantages. Here's a closer look at the features of these plans, examples of qualified retirement plans and how to make the most of your plan if you choose to participate.
What Are Qualified Retirement Plans?
Qualified retirement plans are employer-sponsored retirement plans that meet IRS requirements. Internal Revenue Code Section 401(a) sets rules for who can participate in a qualified retirement plan, how much can be contributed, when and how distributions from the plan are taken and when participants are vested in their plans.
Many private-sector employer plans must also comply with the federal Employee Retirement Income Security Act of 1974 (ERISA), which imposes additional requirements to protect plan participants. ERISA sets minimum standards including requiring plan fiduciaries to be accountable, guaranteeing certain benefits if a plan is terminated, and requiring plans to give participants information about plan features, funding and more.
Participants in qualified retirement plans may enjoy benefits such as sheltering income via pretax contributions and deferring taxes on earnings until withdrawal. Employers also benefit from making tax-deductible contributions to employees' accounts.
Learn more: What Does It Mean to Be "Vested"?
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Types of Qualified Retirement Plans
There are two basic categories of qualified retirement plans: defined benefit plans and defined contribution plans.
Defined Benefit Plans
Defined benefit plans guarantee a set retirement benefit for life, often based on your pay and years of service. Typically, the employer makes most of the contributions to a defined benefit plan, although some plans allow or require employees to contribute too.
Traditional Pension Plans
Traditional pension plans provide a predetermined payment after retirement. That may be a guaranteed dollar amount or, more often, an amount based on a formula that considers factors such as your salary, age and how long you worked for the employer. For example, you might receive a percentage of your average wages for the past five years of employment multiplied by the number of years you worked for your employer.
Cash Balance Pension Plans
Cash balance pension plans guarantee a set account balance after retirement. The employer shoulders all the risk: If the value of the plan's investments change, participants' benefits aren't affected.
When you retire, you can take the account balance of a cash balance pension as a lump sum, with the option to roll it over into another type of investment, or you can use the balance as an annuity and draw payments from it for life.
Government employers commonly offer defined benefit plans, but the plans have become rare in the private sector. The Bureau of Labor Statistics reports that as of March 2025, 86% of state and local government workers had access to defined benefit plans, compared with just 14% of private-sector workers. Private employers are more likely to offer defined contribution plans.
Learn more: What Is a Pension Fund?
Defined Contribution Plans
Defined contribution plans don't guarantee employees a specific amount at retirement. Instead, they allow employees and/or employers to put money into a retirement account for the employee. The amount the employee ultimately receives depends on how much is contributed to the plan and how well their investments perform.
There are several types of defined contribution plans:
401(k) Plans
The most popular type of employer-sponsored retirement plan, 401(k) plans enable employees to put aside a percentage of their pretax pay. Many employers match your 401(k) contributions up to a certain percentage of your wages. You can usually select from a range of investments for your 401(k) funds. Money in a 401(k) account isn't taxed until you withdraw it, which you can do without penalty starting at age 59½.
Roth 401(k) Plans
Some employers also offer Roth 401(k) plans. The primary difference from standard 401(k) plans is that money is contributed to a Roth 401(k) after taxes are paid, but you don't pay tax when you withdraw the money in retirement. This can be beneficial if you expect to be in a higher tax bracket after retiring.
403(b) Plans
Like 401(k) plans, 403(b) plans let employees invest pretax income that generally isn't taxed until the money is distributed in retirement. Sometimes called tax-sheltered annuity plans, 403(b) plans are commonly offered to employees of public schools, tax-exempt organizations and churches. Most 403(b) plans sponsored by private, tax-exempt employers are qualified plans. However, some (generally government or church plans) are not subject to ERISA.
457 Plans
State and local government employers and nonprofit organizations may offer 457 plans. Employees can contribute part of their pretax wages to a 457 account to grow tax-deferred until the money is withdrawn in retirement. The most common type of 457 plan is the 457(b), typically offered to public sector workers such as civil servants.
Thrift Savings Plan (TSP)
Thrift savings plans are similar to 401(k) plans but designed for federal employees and military service members. Participants can contribute part of each paycheck to a TSP account; the government matches a percentage of the employee's contributions. Participants can choose from a traditional TSP, where contributions are made pretax and taxed on withdrawal, or a Roth TSP, where contributions are made after taxes and may be eligible for tax-free withdrawal.
Profit-Sharing Plan
In this type of plan, employers contribute money to a separate account for each employee. (Employees typically cannot contribute.) Employers do not have to contribute every year or contribute a set amount, but they must have a set formula for dividing their contributions among employee accounts.
Money Purchase Plan
Unlike profit-sharing plans, money purchase plans require employers to make an annual contribution for each eligible employee based on a fixed percentage of the employee's wages. Some money purchase plans allow employees to make contributions too.
Simplified Employee Pension (SEP) IRA
An employer opens a SEP-IRA account for each employee and contributes a percentage of the employee's compensation to the plan. The money isn't taxed until it's withdrawn. Employer contributions to a SEP-IRA plan can vary from year to year, but the percentage contributed must be equivalent for all employees.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
A SIMPLE IRA is designed for businesses with 100 employees or fewer. Employers can either match employee contributions dollar for dollar up to 3% of earnings or can make a 2% nonelective contribution for every employee earning $5,000 or more, whether or not the employee contributes to the plan.
Employee Stock Ownership Plan (ESOP)
These plans tie retirement savings to the performance of the employer's stock. The employer provides or buys stock and puts it in an ESOP account for employees tax free; withdrawals from your account in retirement are taxed.
Tip: Being vested means you own some or all of the funds in your retirement account even if you leave your job. Some retirement plans require employees to be 100% vested from the start; others tie vesting to your years of service. If you're considering a job change, make sure you understand your employer's vesting rules first.
Pros and Cons of Qualified Retirement Plans
Qualified retirement plans offer lots of benefits, but there are also some drawbacks to be aware of.
Pros
They may offer tax benefits. Pretax contributions to a qualified retirement plan can reduce your taxable income; Roth contributions may allow tax-free withdrawals later on.
Employers may contribute to your account. Some employers match a percentage of your contributions. The additional contribution can significantly boost your savings.
Participation enables automatic savings. Contributions to a qualified retirement plan are made via payroll deductions, so you can save without thinking about it.
Some plans offer participant protections. Qualified retirement plans that are subject to ERISA include protections such as fiduciary and disclosure standards and guarantee some of your benefits if the plan is terminated.
Plans are widely available. Many employers offer qualified retirement plans. IRS rules prohibiting discrimination require plans to be open to all eligible employees.
Cons
Contribution limits apply. The IRS limits how much you can contribute to each type of qualified retirement plan annually. These restrictions can make it difficult for high earners to save enough to maintain their lifestyle in retirement.
Early withdrawals may trigger taxes and penalties. Rules vary by plan, but generally you'll face penalties and additional taxes if you withdraw money before age 59½.
Required minimum distributions may be required. Many qualified retirement plans require you to start taking distributions at age 73, even if you'd rather leave your money in the plan to grow.
Investment choices may be limited. Retirement plans typically offer a set investment menu, which may not include the options that sophisticated investors want.
Vesting requirements may delay access to funds. The IRS requires employee contributions to a qualified retirement plan to vest immediately. However, depending on your plan rules, employer contributions may take more time to vest.
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Qualified vs. Nonqualified Retirement Plans
Most employers offer qualified retirement plans, but some also offer nonqualified retirement plans to executives or key employees. Nonqualified plans allow high-earning employees to save more than the IRS limits on qualified retirement plan contributions allow.
Unlike qualified retirement plans, nonqualified retirement plans do not have to be available to all eligible employees. Instead, they can be tailored to an individual executive's needs.
Nonqualified retirement plans offered by private employers do not have to follow ERISA guidelines. Because nonqualified plans are essentially contracts with an employer, they're riskier than qualified retirement plans. Participants could lose their savings if the employer closes or becomes insolvent.
| Qualified Plan | Nonqualified Plan |
|---|---|
| Generally available to all eligible employees | Offered only to select employees |
| IRS sets limits on contributions | No IRS limit on contributions |
| Must follow ERISA guidelines | Not governed by ERISA guidelines |
| Money is held in trust, separate from employer's assets | Deferred compensation generally remains part of employer's assets |
| Funds can be rolled over into an IRA or new 401(k) | Deferred amounts typically can't be rolled over into an IRA or new 401(k) |
| May be able to borrow against account value | Typically no option to borrow |
| May be able to withdraw funds early | Typically cannot withdraw funds early |
Learn more: What Is a Nonqualified Retirement Plan?
How to Get the Most Out of a Qualified Retirement Plan
Follow these tips to get the most from your workplace retirement plan:
- Start early. Contributing to a retirement account as soon as you become eligible gives your money more time to grow, maximizing the benefits of compound interest.
- Take advantage of any employer match. Aim to contribute at least enough to get your full employer match; otherwise, you're leaving free money on the table.
- Gradually increase contributions. A common guideline is to save 15% of your income for retirement beginning in your 20s, upping that to 20% in your 40s and beyond. Putting part or all of any wage increases into your retirement account can be a painless way to save more over time.
- Know the IRS limits. The 2026 contribution limits are $24,500 for 401(k), 403(b), 457 and TSP plans; $7,500 for traditional and Roth IRAs; and $17,000 for SIMPLE IRAs.
- Consider making catch-up contributions. For 2026, people ages 50 and older can make additional catch-up contributions of up to $8,000 to 401(k), 403(b), 457 and TSP accounts; up to $4,000 to SIMPLE accounts; and up to $1,100 to traditional and Roth IRAs. (Those ages 60 to 63 can instead opt for a super catch-up contribution of up to $11,250 to 401(k), 403 (b), 457 and TSP accounts and up to $5,250 to SIMPLE accounts.)
- Use Roth and pretax options strategically. Pretax contributions to retirement accounts can lower your current taxable income, while Roth contributions made after taxes may allow tax-free withdrawals in retirement. Consulting a financial advisor can help you determine the best way to maximize retirement income while minimizing taxes.
- Review your investment mix periodically. It's generally advised to make riskier investments when you're younger and shift to more conservative options as you age. Many retirement plans let you invest in target-date funds, which automatically rebalance into lower-risk investments as you near retirement.
- Know your plan's vesting rules. Understanding when you'll be fully vested in your retirement account can help you determine the best time to change jobs or retire.
- Understand your rollover options. If you're planning to change jobs, rolling over your employer-sponsored retirement funds into an account with your new employer can make your investments easier to manage.
Learn more: Best Ways to Invest Your Money at Every Age
Frequently Asked Questions
Are Military Retirement Plans Qualified or Nonqualified?
Military retirement plans are qualified plans. Depending on when they joined the military, service members may participate in a defined benefit plan (a pension plan), a defined contribution plan (a TSP) or both.
Is a TSP a Qualified Retirement Plan?
Yes, a TSP, or thrift savings plan, is a qualified retirement plan—specifically, a defined contribution plan. A TSP works similarly to a 401(k) plan but is designed for federal employees and military service members.
Is a 403(b) a Qualified Retirement Plan?
A 403(b) plan is a qualified retirement plan offered by public schools and some tax-exempt nonprofits. It typically works much like a 401(k) plan, enabling employees to set aside pretax income for retirement and pay taxes at distribution. Some 403(b) plans offer Roth accounts in which participants are taxed on contributions and withdrawals may be tax-free.
The Bottom Line
Offering tax advantages and potentially employer contributions, qualified retirement plans can be a convenient way to save for retirement. No matter what kind of retirement plan your employer offers, making contributions as soon as you're eligible can help you build a bigger nest egg.
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