401(a) Plan: What It Is, Contribution Limits, Withdrawal Rules

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows dollar or percentage-based contributions from the employer, the employee, or both. The sponsoring employer establishes eligibility and the vesting schedule. The employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.

Key Takeaways

  • A 401(a) plan is employer-sponsored, and both the employer and employee can contribute.
  • 401(a) plans are usually used by government and non-profit organizations.
  • 401(a) plans give the employer a larger share of control over how the plan is invested.
  • An employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.
  • Investments in 401(a) plans are low risk and typically include government bonds and funds focused on value-based stocks.

401(a) Plan

Understanding a 401(a) Plan

There are a variety of retirement plans that employers can offer their employees. Each comes with different stipulations, restrictions, and some are better suited for certain types of employers.

A 401(a) plan is a type of retirement plan made available to those working in government agencies, educational institutions, and non-profit 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, which are more common in profit-based industries. 401(a) plans do not allow employees to contribute to 401(k) plans, however.

If an individual leaves an employer, they do have the option of transferring the funds in their 401(a) to a 401(k) plan or individual retirement account (IRA).

Employers can form multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts, and vesting schedules. Employers use these plans to create incentive programs for employee retention. The employer controls the plan and determines the contribution limits.

To participate in a 401(a) plan, an individual must be 21 years of age and have been working in the job for a minimum of two years. These conditions are subject to vary.

Contributions for a 401(a) Plan

A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax 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.

The majority of voluntary contributions to a 401(a) plan are capped at 25% of an employee's annual pay.

Investments for a 401(a) Plan

The plan gives employers more control over their employees' investment choices. Government employers with 401(a) plans often limit investment options to only the safest and most secure options to minimize risk. A 401(a) plan assures a certain level of retirement savings but requires due diligence by the employee to meet retirement goals.

Vesting and Withdrawals for a 401(a) Plan

Any 401(a) contributions an employee makes and any earnings on those contributions are immediately fully vested. Becoming fully vested in the employer contributions depends on the vesting schedule the employer sets up. Some employers, especially those who offer 401(k) plans, link vesting to years of service as an incentive for employees to stay with the company.

The Internal Revenue Service (IRS) subjects 401(a) withdrawals to income tax withholdings and a 10% early withdrawal penalty unless the employee is 59½, dies, is disabled, or rolls over the funds into a qualified IRA or retirement plan through a direct trustee-to-trustee transfer. 

Qualifying for 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, the tax benefits for traditional IRA contributions may be phased out depending on the employee's adjusted gross income.

401(a) vs. 401(k) Plans

A 401(a) plan is similar to a 401(k), another type of employer-sponsored plan that provides a tax advantage for retirement investments. The main difference is who participates: while 401(k) plans are intended for private sector employees, 401(a) plans are directed towards employees of government bodies, educational institutions, and charitable organizations. These plans also tend to offer fewer, more conservative investment options than those found in a 401(k) plan.

If you work in the private sector, you can contribute to a 401(k) plan after one year. But if your employer offers a 401(a) plan, it takes two years.

There are also important rule differences between the two types of plans. With a 401(k) plan, participation is voluntary, and the employee can decide how much money to contribute towards the plan so long as it is below the legal limit. Employers may match a portion of the employee's contribution, but many do not.

But in a 401(a) plan, employers can make it mandatory for their employees to participate. But employers are also required to contribute to their employees' accounts. They can also decide whether the 401(a) plan is to be funded with pre-tax or after-tax dollars.

401(a) vs. 401(k) plans

  • Offered by private sector employers

  • Employees become eligible after one year.

  • Employees elect to participate in the plan.

  • Employers may match a portion of employee contributions.

  • More investment options.

  • Offered by government bodies, educational institutions, and charities.

  • Employees become eligible after two years.

  • Employers can make participation mandatory.

  • Employers must contribute to their employee's plans.

  • Investment options tend to be fewer and more conservative than a 401(k)

Tips for a 401(a) Plan

As with other types of retirement plans, it is important to understand the rules and fees associated with a 401(a) before making a significant contribution. This caution can help reduce your costs and expenses further down the line.

Here are some ways to make the most out of a 401(a) or any other tax-advantaged retirement account:

  • Understand the Rules. As with other tax-advantaged retirement accounts, there are strict rules about what you can do with the money in a 401(a) account. If you take money out before you reach age 59½, you may face a 10% penalty, except for certain emergency expenses. It is important to understand the rules for holding and closing your account to avoid unexpected tax implications.
  • Understand the fees. In addition to taxes, there are also fees associated with a 401(a) account that are used to offset the administrative costs of maintaining your investment account. High plan fees can easily eat into your portfolio gains, so it is important to talk to your employer and understand how much the plan will actually cost you.

What Happens to My 401(a) Plan When I Quit?

The money in your 401(a) or other employer-sponsored retirement account belongs to you, even after you leave the employer. When you lose your job, that money can be taken as a distribution (with a possible early withdrawal penalty) or rolled into a different retirement account, such as an IRA.

What's the Difference Between a 401(a) and 403(b)?

A 401(a) plan and a 403(b) are both types of tax-advantaged retirement plans available to certain public-sector employees. Unlike a 401(a), a 403(b) plan is aimed at employees of public schools and tax-exempt organizations, and their investment options are limited to annuities or mutual funds. The main difference is that an employer can make participation in a 401(a) plan mandatory, while it remains voluntary for employees to participate in a 403(b).

How Much Can I Invest in a 401(a) Plan?

A 401(a) plan does not have the same investment limits as a 401(k) plan. Most plans cap voluntary contributions to 25% of the employee's take-home pay.

The Bottom Line

A 401(a) plan is a type of tax-advantaged account that allows public-sector employees to save for retirement. These plans typically offer fewer investment options than other types of plans, and they are also relatively low-risk. Although employers can make participation mandatory, there are may also be a tax credit for those who contribute to a 401(a).

Article Sources
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  1. Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."

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