10.1 ERISA & Qualified Plans
ERISA establishes federal standards to protect private corporate pension and 401(k) plans. Understanding the criteria for qualified status is essential for suitability questions.
Key FINRA Exam Takeaways
- ERISA (Employee Retirement Income Security Act of 1974) governs private-sector employer retirement plans.
- Eligibility: All employees aged 21 or older who have worked at least 1,000 hours in a 12-month period must be eligible.
- Vesting: Employer contributions must become non-forfeitable according to statutory vesting schedules.
- Tax status: Contributions are PRE-TAX (tax-deductible for employer), earnings grow tax-deferred, distributions are 100% taxable as ordinary income.
- Qualified plans cannot discriminate in favor of highly compensated employees.
Qualified vs. Non-Qualified Plans
Qualified plans (401k, 403b, Defined Benefit) meet ERISA guidelines: pre-tax contributions, tax-deferred growth, strict non-discrimination, and fiduciary oversight. Non-Qualified plans (Deferred Compensation, Executive Bonus) can discriminate in favor of key executives, but contributions are after-tax.
Knowledge Checkpoint • Section 10.1
Under ERISA minimum participation standards, which of the following corporate employees MUST be permitted to participate in the company's qualified retirement plan?