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Qualified vs. Nonqualified Plans
Qualified vs. Nonqualified Plans
Brooke Fleming avatar
Written by Brooke Fleming
Updated over a week ago

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Overview: Employers offer various deferred compensation or retirement plans, including 401(k) and Roth 401(k) plans, among others like SEP, SIMPLE, 403(b), and 457(b) plans, to provide employees with income during their retirement years.

These plans come in two main categories: qualified and nonqualified, with significant differences in terms of contribution limits, tax benefits, and eligibility requirements.


Additional Resources:

Qualified vs. Nonqualified Plans

Qualified Plans: Meet specific IRS standards, offering tax benefits such as deductible contributions for employers and tax-deferred growth for participants. They must not discriminate in favor of highly compensated employees and have limits on contributions.

  • 401(k) Plans: Traditional plans that offer tax-deferred growth, subject to contribution limits, discrimination testing, and specific operational rules.

  • Roth 401(k) Plans: Similar to traditional 401(k)s, however, contributions are made with after-tax dollars, allowing tax-free withdrawals in retirement.

Nonqualified Plans: These can be discriminatory and have no contribution limits but lack the tax benefits of qualified plans.

Other Retirement Plans

SEP: Simplified Employee Pensions for employers to make contributions directly to traditional IRAs for themselves and their employees.

SIMPLE: Savings Incentive Match Plans for Employees allowing employee and employer contributions with specific limits and rules.

403(b): Tax-sheltered annuity plans for employees of public schools and certain tax-exempt organizations.

457(b): Deferred compensation plans for employees of tax-exempt government entities, can be discriminatory but have similar contribution limits to 401(k) and 403(b) plans.


Q: How do I enter 401(k) deductions within Buddy Punch?

A: You can enter company benefits by logging into your account and following the step-by-step instructions in this article: How to Add Company Benefits | Buddy Punch Docs

Q: Can I contribute to both a 401(k) and a Roth 401(k)?

A: Yes, you can contribute to both, but the total contributions cannot exceed the IRS-set limits for that year.

Q: What happens to my contributions in a 401(k) plan if I switch jobs?

A: You generally have several options, including leaving the funds in your former employer's plan, rolling them over to your new employer's plan, rolling them into an IRA, or cashing out (which may incur taxes and penalties).

Q: Are there contribution limits for 401(k) plans?

A: Yes, both 401(k) and Roth 401(k) plans have contribution limits. Refer to the IRS website for the most accurate and up-to-date information.

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