What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored聽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聽rollover聽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.

401(a) Plan

Understanding a 401(a) Plan

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

A 401(a) plan is a type of retirement plan made available to those working in government agencies, educational institutions, and non-profit organizations.聽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.

Contributions for a 401(a) Plan

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

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

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

Vesting and Withdrawals for 401(a) Plans

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

The IRS subjects 401(a)聽withdrawals聽to income tax withholdings and a 10% early withdrawal penalty unless the employee is 59 1/2, dies, is disabled,聽or rolls over the funds into a qualified IRA or retirement plan through a direct trustee-to-trustee transfer.聽

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