What type of retirement plans receives favorable tax treatment under the IRC?

Qualified plans receive favorable tax treatment under the Internal Revenue Code (IRC) primarily because they adhere to specific requirements set by the IRS. These requirements include adhering to contribution limits, ensuring plan participation is non-discriminatory (meaning it benefits a broad class of employees rather than a select few), and providing a certain level of funding security for the participants.

One of the significant benefits of qualified plans is that contributions made to these plans are typically tax-deductible for the employer and grow on a tax-deferred basis until retirement. Employees also do not pay taxes on contributions or investment earnings until they withdraw funds, generally during retirement when they may be in a lower tax bracket.

In contrast, nonqualified plans do not receive the same tax benefits, as they can discriminate in favor of higher-paid employees, and contributions do not enjoy upfront tax deductions and might be taxed upon vesting rather than at withdrawal. Defined benefit plans can be qualified plans if they meet IRC requirements, but not all defined benefit plans automatically qualify for favorable tax treatment. Deferred compensation plans can sometimes be nonqualified, and while they can offer tax advantages, they often do not share the same favorable tax treatments as qualified plans under the IRC.

Thus, understanding that qualified plans are the ones that