Qualified plan

What a qualified plan is

To be qualified, a plan must have a written document, be run for the exclusive benefit of participants, and meet rules on coverage, nondiscrimination, contribution limits, vesting and distributions. In return the employer deducts its contributions, employees are not taxed until they take money out, and the trust’s earnings are tax-exempt.

Why it matters to employers

“Qualified plan” is the phrase state retirement mandates use. An employer that sponsors one is generally exempt from the state auto-IRA program, and state laws usually extend the exemption to 403(b), SEP and SIMPLE IRA plans as well. A plan that breaks the rules can lose its qualified status, which would make contributions taxable. The IRS correction program, EPCRS, exists so that mistakes can be fixed before that happens.

Example

A California employer with a 401(k) receives a CalSavers notice. It reports to CalSavers that it sponsors a qualified plan and is recorded as exempt.

Common mistakes

• Assuming a payroll deduction IRA, or an employee’s own IRA, counts as the employer’s qualified plan.

• Running the plan differently from what the plan document says.

• Using “qualified” and “ERISA” as if they meant the same thing. Qualification is a tax rule; ERISA is a labor law, and some qualified plans, such as an owner-only 401(k), are not subject to ERISA’s main requirements.