Frequently Asked Questions

What makes a pension plan 'tax qualified?'

The U.S. Government gives tax qualified status to pension plans that meet the following criteria:

  1. contributions made by the sponsoring Employer to the plan are tax deductible
  2. investment earnings within the trust are tax deferred
  3. contributions plus any investment earnings become taxable to a participant only when the participant receives a distribution from the plan; a participant can continue to defer any taxes by electing a direct rollover to an IRA or another qualified retirement plan

Can any type of Employer entity establish a qualified retirement plan?

A qualified retirement plan can be adopted by a corporation (C or S), a partnership, an LLC or LLP, or a sole proprietor.

What reportable compensation is used to determine retirement benefits and contributions?

For corporations, it is W-2 compensation. S-Corp. distributions are not includable. For partners in a partnership, it is K-1 earned income. Unearned income (such as interest, dividends, royalties, etc.) are not includable. For a sole proprietor, it is Schedule C income.

Is there a maximum compensation limit?

Maximum compensations apply to a variety of plans. See Caps and Maximum Compensation Limits for more information.

What is the deadline for making a tax deductible contribution to a qualified retirement plan?

Employer tax deductible contributions must be made by the due date (including any extensions) of the Employer’s tax return. Qualified retirement plans which are subject to minimum funding standards (i.e. defined benefit, money purchase & target benefit plans) must make the required plan contribution no later than 8 ½ months after the plan year end to avoid a funding deficiency and the imposition of excise taxes.

Must a qualified retirement plan have a written plan document, and if so, by what date must it be adopted?

A written plan document is required, and it must be adopted no later than the last day of the Employer fiscal year for which a plan contribution will be claimed as a tax deduction.

What are the different types of qualified retirement plans?

Qualified retirement plans are classified as either Defined Contribution (DC) or Defined Benefit (DB). View our plan types to learn more about each of these structures and which might best suit your needs.

What is the maximum annual amount that can be allocated to a participant in a DC plan?

The maximum annual amount is the lesser of 100% of compensation or the limit specified for the current year, subject to tax deductible contribution limitations.

What is the maximum annual 401(k) deferral?

The 401(k) annual deferral limits are listed in our Caps and Maximum Contribution section.

When must 401(k) deferral contributions be remitted to a plan?

The Department of Labor (DOL) requires that amounts withheld from a participant’s wages for contribution to a retirement plan be deposited as of the earliest date on which such contributions can reasonably be segregated from the Employer’s general assets, but in no event later than the 15th business day of the month following the month in which deferrals were withheld.

Does an Employer have to cover all of its employees in a qualified retirement plan?

No. The following types of employees can be excluded statutorily:

  1. part-time employees who work less than 1,000 hours during a year
  2. employees who belong to a union in which retirement benefits were negotiated in a collective bargaining agreement
  3. non-resident aliens with no US source income
  4. full-time employees (working at least 1,000 hours during a year) who have not completed one year of service and/or attained age 21

Additional exclusions are permissible, subject to satisfaction of IRS requirements on minimum coverage, nondiscrimination and vesting.

Can a participant borrow money from a qualified retirement plan?

Yes, provided the plan document contains a participant loan provision. The maximum amount that a participant may borrow from a plan is generally 50% of their vested account balance, but not more than $50,000. Loans must be charged a competitive interest rate (usually Prime Rate plus 1%). Loans must be repaid over a period, not to exceed five years, unless the loan is being used to purchase a primary residence. In that case, loans may be repaid over a longer period of time.

How are distributions from a qualified retirement plan taxed to a participant?

Distributions from a qualified retirement plan that are not taken as a direct rollover to an IRA or another qualified retirement plan are subject to 20% federal tax withholding. Hence, the participant will only receive 80% of the total benefit. Distributions taken as a direct rollover would not be subject to the 20% federal tax withholding, and would not be subject to taxation until subsequently withdrawn from an IRA or qualified retirement plan.

Distributions taken before age 59 ½ are subject to an additional 10% excise tax, unless:

  1. on account of death or disability of the participant,
  2. the distribution is part of a series of substantially equal periodic payments (not less frequently than annually) made over the life (or life expectancy) of the participant or the joint lives (or joint life expectancies) of the participant and designated beneficiary, or
  3. on account of separation of service after attainment of age 55

When must distributions be taken from a qualified retirement plan?

Minimum required distributions must commence at a participant’s required beginning date, defined to be the following:


    1. in the case of a 5% owner, the April 1 following the calendar year in which the 5% owner attains age 70 ½; minimum required distributions must continue each calendar year thereafter, including the same year (if applicable) in which the first minimum required distribution was taken
    2. in the case of a non-5% owner, the April 1st following the later of the calendar year in which the non-5% owner attains age 70½ or retires from the Employer sponsoring the plan; minimum required distributions must continue each calendar year thereafter, including the same year (if applicable) in which the first minimum required distribution was taken


Minimum required distributions are determined in accordance with IRS regulations and tables. Generally, they are computed by dividing the participant’s account balance by the life expectancies of the participant and the designated beneficiary.

There is a 50% excise tax on any portion of a minimum required distribution that is not taken.

Are qualified retirement plans subject to any annual government filing requirements?

Each year, reporting and disclosure series Form 5500 (with supporting schedules) must be filed with the government. The due date (without extension) for filing the Form 5500 is the last day of the seventh month following the end of the plan year. The due date can be extended for an additional 2 ½ months by filing an extension (Form 5558).

Example: A qualified retirement plan with a calendar plan year must file its 2012 Form 5500 by July 31, 2013 (without extension). With an extension, the due date can be extended to October 15, 2013.