F.47 Qualified Plan Overview

Certified Financial Planner CFP

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1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

H.65 Client and Planner Attitudes, Values, Biases H.65.1 Money Scripts and Money Attitudes H.65.2 Planner Self-Awareness H.66 Behavioral Finance H.66.1 Cognitive Biases H.66.2 Emotional Biases H.66.3 Heuristics and Mental Accounting H.67 Sources of Money Conflict H.67.1 Couples and Money Conflict H.67.2 Family and Intergenerational Money Conflict H.68 Principles of Counseling H.68.1 Therapeutic Techniques in Financial Planning H.68.2 Professional Boundaries and Referrals H.69 General Principles of Effective Communication H.69.1 Listening and Questioning Skills H.69.2 Managing Difficult Conversations H.69.3 Non-Verbal Communication H.70 Crisis Events with Severe Consequences H.70.1 Death and Divorce H.70.2 Job Loss and Health Crisis H.70.3 Sudden Wealth and Sudden Loss H.70.4 Natural Disasters and Traumatic Events

F.47 Qualified Plan Overview

Key Takeaways Explain This Topic AI

Qualified plans must meet ERISA requirements to receive tax benefits: deductible contributions, tax-deferred growth, and ERISA protection

Pension plans promise a pension at retirement with mandatory funding; profit sharing plans promise deferred compensation with discretionary funding

Defined benefit plans: employer bears investment risk, participants have accrued benefits, PBGC coverage, favor older employees

Defined contribution plans: employee bears investment risk, participants have individual account balances, no PBGC coverage, favor younger employees

Pension plans limited to 10% investment in employer securities; profit sharing plans may invest up to 100%

Employer contributions to qualified plans avoid payroll taxes; employee deferrals remain subject to FICA/Medicare

Last updated: October 2026

Qualified Plan Overview

A qualified retirement plan is an employer-sponsored retirement savings arrangement that meets the requirements of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. By meeting these requirements, qualified plans receive significant tax advantages for both employers and employees.

ERISA and Qualification Requirements

What Makes a Plan "Qualified"?

To be qualified, a retirement plan must satisfy specific requirements under IRC Section 401(a) and ERISA, including:

Written plan document - Must be in writing by end of tax year (funding can occur until tax return filing plus extensions)

Eligibility requirements - Age 21 and one year of service (or two years with 100% immediate vesting, except 401(k) plans)

Coverage tests - Must cover a sufficient percentage of non-highly compensated employees
Vesting schedules - Must meet minimum vesting requirements for employer contributions
Nondiscrimination - Cannot discriminate in favor of highly compensated employees
Contribution/benefit limits - Must comply with IRC Section 415 limits
Tax Advantages of Qualified Plans

Qualified plans offer three major tax benefits:

Tax Advantage Description
Deductible Contributions Employer contributions are tax-deductible as a business expense
Tax-Deferred Growth Investment earnings accumulate tax-free until distributed
Payroll Tax Avoidance Employer contributions avoid FICA/Medicare payroll taxes

Important Distinction: While employer contributions avoid payroll taxes, employee elective deferrals (such as 401(k) contributions) remain subject to Social Security and Medicare taxes.

ERISA Protections

Qualified plans provide significant legal protections:

Anti-alienation provision - Plan assets cannot be assigned, garnished, levied, or subject to bankruptcy proceedings

Fiduciary requirements - Plan fiduciaries must act in participants' best interests
Reporting and disclosure - Annual Form 5500 filing, Summary Plan Description (SPD) to participants
Enforcement - DOL and IRS oversight with penalties for violations

CFP Exam Note: When assets are rolled from a qualified plan to an IRA, ERISA protection is lost, though federal bankruptcy law provides protection for rollover IRAs.

Categories of Qualified Plans

Qualified plans are organized into two main categories, each with distinct characteristics:

Pension Plans vs. Profit Sharing Plans

Characteristic Pension Plan Profit Sharing Plan
Legal Promise Pay a pension at retirement Defer compensation
Mandatory Funding Yes No (but must be substantial and recurring)
In-Service Withdrawals Only after age 59 1/2 (DB plans) After 2 years of participation
Investment in Employer Securities Limited to 10% Up to 100%
QJSA/QPSA Required Yes No (unless plan distributes annuities)
Types Within Each Category

Pension Plans:

Defined Benefit Pension Plans
Cash Balance Pension Plans
Money Purchase Pension Plans
Target Benefit Pension Plans

Profit Sharing Plans:

Profit Sharing Plans
401(k) Plans (CODA)
Stock Bonus Plans
Employee Stock Ownership Plans (ESOPs)
Thrift Plans
Defined Benefit vs. Defined Contribution Plans

The most important classification of qualified plans is whether they are defined benefit (DB) or defined contribution (DC):

Key Differences

Feature Defined Benefit Defined Contribution
What is Defined The retirement benefit The contribution amount
Investment Risk Employer Employee
Account Type Commingled (accrued benefits) Separate individual accounts
PBGC Coverage Yes (with exceptions) No
2026 Limit $290,000 annual benefit $72,000 annual additions
Favors Older employees Younger employees
Prior Service Credit Allowed Not allowed
Forfeitures Reduce plan costs only Reduce costs OR allocate to participants
Actuary Required Yes (annually for DB, at inception for target benefit) No (except target benefit)
Investment Risk Allocation

One of the most critical distinctions for exam purposes:

Defined Benefit: The employer bears all investment risk. Poor investment performance increases employer funding requirements, but participant benefits remain unchanged.

Defined Contribution: The employee bears all investment risk. Investment gains and losses directly affect the participant's account balance and ultimate retirement benefit.

Commingled vs. Separate Accounts

DB Plans (Commingled) DC Plans (Separate)
Single pooled trust holds all assets Individual account for each participant
Participants have accrued benefits Participants have account balances
Cannot identify "your" assets Can see specific investments and balance
Investment performance affects employer costs Investment performance affects participant benefits
PBGC Coverage

The Pension Benefit Guaranty Corporation (PBGC) insures defined benefit pension plans to protect participants if a plan terminates without sufficient assets.

PBGC 2026 Premiums and Guarantees

Item 2026 Amount
Single-Employer Flat Rate Premium $111 per participant
Variable-Rate Premium $52 per $1,000 of unfunded vested benefits
Maximum Monthly Guarantee (age 65) $7,790/month ($93,477/year)
Multiemployer Plan Maximum $35.75 per year of service
Plans NOT Covered by PBGC
All defined contribution plans (no PBGC coverage)
Professional service employers (doctors, lawyers, architects, etc.) with fewer than 25 employees
Plans maintained exclusively for substantial owners

CFP Exam Tip: The "professional firm with fewer than 25 employees" exception is frequently tested. All other DB plans are covered by PBGC.

Forfeitures Treatment

When participants leave before fully vesting in employer contributions, the non-vested portion is forfeited. The treatment of forfeitures differs between plan types:

DB Plans

Forfeitures can only reduce plan costs (employer funding requirements).

DC Plans

Forfeitures can either:

Reduce employer contributions , OR
Be reallocated to remaining participants

The plan document specifies which method applies.

Who Benefits Most from Each Plan Type

Defined Benefit Plans Favor Older Employees Because:

Older employees have less time for compound growth, requiring larger annual contributions
The actuarial cost to fund a given benefit is higher when there are fewer years to fund it
Credit can be given for prior service (years worked before plan was established)
Benefit is based on final average salary (often highest near retirement)

Exception: Cash balance plans (a type of DB plan) favor younger employees because they resemble DC plans with hypothetical accounts.

Defined Contribution Plans Favor Younger Employees Because:

More years for investments to grow through compound interest
Same dollar contribution has greater value over 30 years vs. 10 years
No credit given for prior service
Early contributions have greatest time for tax-deferred growth

Exception: Target benefit plans (a type of DC plan) favor older employees because contributions are calculated to achieve a target retirement benefit.

Plan Type Classification Favors
Traditional DB Defined Benefit Older employees
Cash Balance Defined Benefit Younger employees
Profit Sharing Defined Contribution Younger employees
401(k) Defined Contribution Younger employees
Money Purchase Defined Contribution Younger employees
Target Benefit Defined Contribution Older employees
Special Taxation Options

Qualified plans offer special tax treatment not available with IRAs:

Pre-1974 Capital Gain Treatment

Participants with pre-1974 participation may treat a portion of lump-sum distributions as capital gain (rarely tested, but may appear as answer choice).

10-Year Forward Averaging

Participants born before 1936 may use special averaging to reduce tax on lump-sum distributions.

Net Unrealized Appreciation (NUA)

Lump-sum, in-kind distributions of employer stock receive favorable capital gain treatment on the appreciation.

Important: These special taxation options are lost if assets are rolled to an IRA.

Qualified Plan Quick Reference

Requirement Standard
Written Plan Document Required by end of tax year
Eligibility Age 21 + 1 year service (or 2 years with 100% vesting)
401(k) Eligibility Age 21 + 1 year only (cannot use 2-year rule)
Coverage Must pass Safe Harbor, Ratio %, or Average Benefits test
DB Vesting 3-7 year graded or 5-year cliff
DC Vesting 2-6 year graded or 3-year cliff
Top-Heavy Vesting 2-6 year graded or 3-year cliff (both DB and DC)
2026 Covered Compensation $360,000
2026 DB Benefit Limit $290,000
2026 DC Annual Additions $72,000
2026 401(k) Deferral $24,500 + $8,000 catch-up