401(k) and Qualified Plans: Conclusion

A qualified plan is established by an employer to provide retirement benefits for employees and their beneficiaries. Qualified plans can come in a few different flavors. Let's recap:

• A qualified plan may be a defined-benefit plan or a defined-contribution plan.
• Retirement benefits are based on compensation, years of service and age for defined-benefit plans 
• Varieties of qualified defined-contribution plans include profit-sharing or stock-bonus plans, money-purchase pension plans, 401(k) plans, age-weighted plans and employee stock ownership plans (ESOPs).
• Any business – including sole proprietorships, partnerships, corporations and government entities – may adopt a qualified plan.
• A qualified plan may be funded with employer contributions and/or employee contributions, depending on the type of plan.
• Employee compensation in excess of the compensation cap may not be considered for the purposes of making plan contributions.
• An employer may contribute up to 25% of compensation to each eligible employee's account, provided the contribution does not exceed $56,000 as of 2019 (or $55,000 for 2018).
• Distributions before an employee reaches the age of 59½ are taxed an additional 10% penalty, unless the employee qualifies for an exception.