401(a) Plan

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What is a '401(a) Plan'

A 401(a) plan is a money-purchase retirement plan that is set up by an employer. The plan allows for contributions by the employer, the employee or both. Contribution amounts are either dollar-based or percentage-based. and the sponsoring employer establishes eligibility and the vesting schedule. Funds can be withdrawn from a 401(a) plan through rollovers to a different qualified retirement plan, a lump-sum payment or through an annuity.

BREAKING DOWN '401(a) Plan'

Employers can form multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts and vesting schedules. Employers use the plan to create incentive programs to help retain employees. Each employer controls the plan and determines the contribution limits.

A 401(a) plan is a type of retirement plan made available to employees of government agencies, educational institutions and nonprofit organizations. Eligible employees who participate in the plan include government employees, teachers, administrators and support staff. A 401(a) plan's features are similar to a 401(k) plan. The key difference is that it is the main retirement plan type offered to teachers.

Contributions

The plan offers either mandatory contributions or voluntary contributions. An employer decides whether contributions are made on an after-tax or pretax basis. Employer contributions are mandatory, even if an employee decides not to contribute to the plan on a voluntary basis.

An employer contributes funds to the plan on an employee's behalf. Employer contribution options include the employer paying a set amount into an employee's plan, matching a fixed percentage of employee contributions or matching employee contributions within a specific dollar range.

Investments

The plan gives employers more control over their employees' investment choices. Government employers offering 401(a) plans to employees often limit investment options to only the safest and most secure investment options to minimize risk.

A 401(a) plan provides assurance of a certain level of retirement savings but requires due diligence by the employee to meet retirement goals. Employees can transfer their funds to 401(k) plans or individual retirement accounts (IRAs) when they switch employers.

Vesting

A 401(a) plan allows 100% vesting of funds regardless of an employee's years of service. Any contributions an employee makes and any earnings are fully vested. Some employers link vesting to years of service as an incentive for employees to stay with the company.

Withdrawals

Withdrawals incur a 20% federal tax penalty unless the employee is 59 1/2, dies, retires, is disabled or rolls over the funds into a qualified IRA or retirement plan. However, if an employee switches employers on his own accord, retires before the plan's defined retirement age or needs the money for a financial hardship, the employee incurs a 10% early distribution penalty.

Tax Credits

Employees who contribute to a 401(a) plan may qualify for a tax credit. Employees can have both a 401(a) plan and an IRA at the same time. However, if an employee has a 401(a) plan, tax benefits for traditional IRA contributions may be phased out depending on the employee's adjusted gross income.

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