Is My Retirement Plan Qualified?

You have several retirement plan options, ranging from those offered by employers to Individual Retirement Accounts (IRA). There are plenty of varying rules and characteristics of each plan. It isn’t uncommon for words and phrases to be used interchangeably, while having different meanings. How do you know if your retirement plan is a qualified retirement plan? It may depend on whom you ask, but there is a definitive answer. Let’s divide tax-deferred vehicles and retirement plans into three categories, qualified retirement plans, non-qualified eligible retirement plans and non-qualified plans.

Qualified Retirement Plans

• Qualified retirement plans are employer sponsored plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), which references specific sections of the tax code like Sec. 401(a). Regulation and and oversight of these plans is far more intense than the other categories of retirement plans.

Here are some examples of qualified retirement plans:

401(k)

Most 403(b)s

Most Defined Benefit plans

457(b) Government plans

Employee Stock Option Plans (ESOP)

 Thrift Savings Plans

Profit Sharing Plans

Non-qualified Eligible Retirement Plans

• Eligible retirement plans that are not qualified retirement plans governed by ERISA are non-qualified eligible retirement plans. IRAs are eligible retirement plans, but they are not qualified retirement plans because ERISA law does not govern them. IRAs are referred to as eligible retirement plans because the funds can be transferred or rolled over from-and-to qualified retirement plans. IRAs share many of the same governing tax law and code sections as qualified plans, which is why the plans have so many similarities. Employer IRAs such as SEP and SIMPLE IRAs are also exempt from ERISA.

Here are some examples of non-qualified retirement plans:

Traditional IRAs

Roth IRAs

SIMPLE IRAs

SEP IRAs

Deferred Annuities

Public (Government) Pensions

The Confusion: Custodians like brokerages, insurance companies and even banks often refer to IRAs as qualified retirement plans. This makes sense because IRAs are eligible retirement plans that can receive rollovers from qualified retirement plans. The confusion lies in the difference between the actual legal definition of qualified retirement plans and what terminology is commonly applied. If you transfer money from one custodial IRA to another, the custodian may refer to the IRA money as qualified money. This can be confusing when a professional tells you that IRAs are not qualified plans later down the road. My preference is to refer to IRAs as personal or business eligible retirement plans.

Annuities: Deferred annuities are non-qualified plans. They offer the same tax deferral characteristic as other retirement plans, and share many of the same characteristics. However, they are not qualified plans and they are not referred to as qualified plans. It is possible for an annuity to be held inside an IRA, which is where the term Individual Retirement Annuity comes from. If this is the case, the IRA governs the taxation and retirement rules the participant must follow because the annuity is inside the IRA. Annuities that are not inside an eligible retirement plan or a qualified retirement plan will always be referred to as non-qualfiied, as they should be.

Authoritative and educational resources for Retirement Plans:

Department of Labor www.dol.gov

Internal Revenue Service www.irs.gov

American Society of Pension Professionals www.aspa.org

American Benefits Council www.appwp.org

Publication 590, 571, 575 and 560 may all be applicable and can be found on the IRS website.