Is a 401(k) a Qualified Retirement Plan?

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 04, 2023

401(k) plans are the most common type of qualified plan used in the retirement savings industry today.

Like all other types of qualified plans, 401(k) plans are governed by the standards set by the Employees Retirement Income Security Act of 1974.

This act created qualified plans as a measure to help employees save money for their retirements.

ERISA created 401(k) plans, 403(b) plans (which are almost identical to 401(k) plans, except that they are designed for charitable and nonprofit organizations such as churches), profit-sharing plans, money purchase pension plans, Keogh plans and other types of plans.

401(k) With Company Stock

When ERISA was passed in 1974, most major corporations told the government that they would not implement any of these plans unless the Act stipulated that employers could allow their employees to buy shares of their employer's stock inside the plan.

The government yielded to this pressure and thus the advent of employees funding their 401(k) plans with shares of company stock came about.

This practice continued unabated until the Enron/Worldcom crash of 2002, where thousands of employees who had their entire 401(k) plans invested in shares of these two companies saw their retirement savings evaporate overnight.

This fiasco led to a push for restrictions on the amount of company stock that employees could put in their 401(k)s.

The charge was made that plan administrators who allowed this practice were failing in their fiduciary duty to look out for the participants' best interests in their plans.

Net Unrealized Appreciation Rule

However, there is still one advantage to owning shares of company stock inside a 401(k) plan.

When an employee who has company shares in his or her plan retires, he or she can spin off these shares of stock and sell them under a special arrangement known as the Net Unrealized Appreciation Rule (NUA).

This provision allows the shares that are sold to receive capital gains treatment instead of being taxed as ordinary income.

This is the only exception in the entire tax code to the broad-based rule that all IRA and qualified plan distributions are to be taxed as ordinary income, unless the distribution is coming from a Roth account.

 

Is a 401(k) a Qualified Retirement Plan FAQs

What is a 401(k) plan?

A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.

Is a 401(k) a Qualified Retirement Plan?

401(k) plans are the most common type of qualified plan used in the retirement savings industry today.

What is the difference between a Roth 401(k) and traditional 401(k)?

With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.

Are there other retirement savings plans other than a 401(k) plan?

Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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