A qualified plan is an employer retirement plan that meets IRS requirements, and in return gets tax advantages: the employer deducts contributions, and employees are not taxed until they take money out. To earn that deal, the plan must be:
1. For the exclusive benefit of employees and their beneficiaries.
2. In writing and communicated to employees.
3. Nondiscriminatory: contributions and benefits cannot favor officers, owners or highly compensated employees.
4. Permanent (not a one-time arrangement) and meeting IRS qualification rules.
5. Subject to vesting rules: how much of the employer's contributions the employee owns, based on years of service.
Eligibility: a plan may not require more than age 21 and 1 year of service (a year of service generally means at least 1,000 hours in a 12-month period) before an employee can join.
Two families of plans:
Defined benefit: promises a specific future benefit (for example, a monthly pension). The employer carries the investment risk. Contributions are larger for older employees close to retirement, so it tends to suit older, highly paid owners.
Defined contribution: the contribution is known (for example, a percentage of pay); the final benefit is not, because it depends on investment results. The employee carries the risk. It tends to suit younger employees with many years to grow.
Life insurance can be held inside a qualified plan only in limited circumstances.