What Does Qualified Pension Plan Mean?
A qualified pension plan is a pension plan that meets the requirements of the Internal Revenue Code Section 401 and the Employee Retirement Income Security Act of 1974 (ERISA), making the individuals eligible for specific tax benefits.
Established by the employer, qualified pension plans give employers a tax break for the contributions they make for employees. It also allows employees to defer a part of their salaries to the plan, thus reducing their income tax liability through the reduction of taxable income.
A qualified pension plan is also known as a qualified retirement plan.
Insuranceopedia Explains Qualified Pension Plan
There are two main types of qualified pension plans:
- Defined benefit.
- Defined contribution.
The defined benefit provides employees a guaranteed payout and places the risk on the employers to save and invest to meet the liabilities of the plan. An example of this pension plan is the traditional annuity type of pension.
The defined contribution plan, on the other hand, is the amount that employees receive in retirement after saving and investing on their own during their working years. A good example of this pension plan is the 401(k) plan. Other examples of qualified pension plans include profit sharing, 403(b) plans, money purchase plans, employee stock ownership plans, simplified employee pension (SEP) and many others.