While most Americans are acutely familiar with 401(k) plans as retirement saving vehicles, there are lesser-known employer-sponsored retirement plans to choose from in some situations. One such example is the 401(a) plan, which is typically offered by not-for-profit organizations, governmental agencies, and educational institutions, as opposed to privately-held corporations. These plans are generally customizable and are only made available to select employees as incentives to encourage loyalty. In some cases, public employees may be extended the option to participate in 401(a) plans in lieu of government pension schemes.
- 401(a) plans are offered by governmental entities and other public employers like schools and non-profit entities.
- The terms of a 401(a) plan are set by employers and are highly customizable.
- 401(a) plans may be available to a select group of employees, to foster their loyalty.
A 401(a) plan can take many shapes, including profit-sharing plans, money-purchase pension plans, or employee stock ownership plans. The employee contribution amounts are governed by the employers, who must also contribute to the program. Contributions can either be made on a pre-tax or a post-tax basis.
The Internal Revenue Service (IRS) imposes stringent regulations for the administration of 401(a) plans under Section 401(a) of the tax code. These rules are quite similar to the guidelines sets for 401(k) plans, of which 401(a) plans are technically a subset.
Specific IRS Guidelines
As of 2020, the maximum allowable contribution to 401(a) plans is either 100% of an employee’s income, or $57,000--whichever value is smaller. This represents a modest increase from $55,000 in 2018, and $56,000 in 2019.
As with most other retirement plans, distributions taken from 401(a) plans by participants younger than 59½ are subject to an additional 10% tax. Furthermore, participants must begin taking required minimum distributions (RMDs) upon reaching the age of 72. This is a change from the previous RMD age of 70½, thanks to recently enacted legislation known as Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE).
Contributions to 401(a) plans can come from a variety of sources, including:
- Employer Contributions (fixed dollar amounts or salary percentages).
- Mandatory Employee Contributions (on a pre-tax basis).
- Employer Matching Contributions.
- Voluntary Employee Elective Contributions, where employees may make after-tax contributions of up to 25% of their total salaries.
Who Dictates the Terms of a 401(a) Plan if Not the IRS?
In some cases, because 401(a) plans are so customizable, the terms and conditions are dictated by the sponsoring employer, rather than by specific IRS guidelines. For example, in addition to delineating the types of investment options available in these plans, employers govern whether employee contributions are voluntary or mandatory, the amount of each employee's contribution, the degree to which that contribution is matched by employer funds, and whether contributions can be made with pre-tax or after-tax dollars.
Employees with 401(a) plans may not simultaneously partake in 401(k) plans.