401(a) vs. 401(k): What's the Difference?

401(a) vs. 403(k): An Overview

The two primary types of defined contribution retirement savings plans offered by employers are 401(k) and 401(a) plans. They take their names from Section 401 of the United States Internal Revenue Code, which defines them.

The principal differences between a 401(a) plan and a 401(k) plan are first in the types of employers that offer them and then in several critical provisions regarding contributions and investment choices.

401(a)

A 401(a) plan is generally offered by government agencies, educational institutions, and nonprofit organizations rather than by corporations. These plans are usually custom-designed and can be offered to key employees as an added incentive to stay with the organization. The employer usually sets the employee contribution amounts, and the employer is also required to contribute to the plan. Contributions can be either pre-or post-tax.

Because the sponsoring employer establishes the contribution and vesting schedules in a 401(a), these plans can be set up in ways that encourage employees to stay. Employee participation is often mandatory. If employees leave, they can usually withdraw their vested money by rolling it over into another qualified retirement savings plan or purchasing an annuity.

The employer determines the plan's investment choices and tends to be limited. Government-sponsored 401(a) plans, in particular, may include only the safest, most conservative investment options.

401(k)

Private-sector employers usually offer a 401(k) plan. A traditional 401(k) allows employees to contribute pre-tax dollars from their paycheck to the account and take a tax deduction for their contributions.

The employer sponsoring the 401(k) plan selects which investment options will be available to participants. However, as a function of their fiduciary duty, they need to be careful to offer a broader range of options than the sponsors of 401(a) plans often do. Plans typically offer 15 to 30 investment options, though research has indicated that too many choices confuse participants.

However, with the SECURE Act of 2019, employees may find more annuity plans offered as investment options in their 401(k) plans. The SECURE Act now protects employers from being sued should the annuity insurer fail to make annuity payments to the plan participants. Assets in a 401(k) plan accrue on a tax-deferred basis and, in the case of traditional 401(k)s, are taxed as regular income when they are withdrawn. Withdrawals from a Roth 401(k) are generally tax-free.

Key Differences

The main difference between a 401(k) and 401(a) plans is the type of job that they offer them, and whether or not there are contribution requirements. If you work for a nonprofit or government job, you will likely have a 401(a) plan as part of your benefits package. The government and nonprofit organizations that offer 401(a) plans make it mandatory for their employees to enroll and contribute an amount set by the employer. If you work for a for-profit company that has a 401(k) retirement plan available, you can choose whether or not you want to enroll, and you can set your contributions.

The tax rules may differ between the two plans. If you have a 401(a), your employer may structure your plan's contributions as either after-tax or pre-tax dollars. It will depend on the employer you work for because the employers, not the employees, structure the way taxes are handled with a 401(a). Pre-tax means contributions are not taxed at the time of investment but later upon withdrawal. After-tax means contributions are taxed before being deposited into the account.

A 401(k) is a tax-deferred retirement plan, and usually, your contributions come directly out of your pre-tax paycheck. You pay income taxes on your withdrawals after your retire at your ordinary tax rate.