401(a)

What Is a 401(a) Plan?

A 401(a) plan is a defined contribution retirement program for public employees. Typically provided by government agencies, this employer-sponsored benefit plan allows participants to save for retirement on a tax-advantaged basis and may be offered alongside other savings plans as part of an employee’s benefit package.

How Does a 401(a) Retirement Plan Work?

Guided by Internal Revenue Code (IRC) Section 401(a), this retirement program may be a stock-bonus plan, pension, or profit-sharing plan. Employees, employers, or a combination of both contribute to the account at a fixed dollar amount or percentage of income as designated in the plan agreement. If an employee leaves the company, they can typically take their retirement nest egg with them and roll it over into another account.

A 401(a) plan contains several features participants should know about, such as:

Contribution Limits

401(a) retirement plans come with certain limitations (just like other programs), which are routinely updated to reflect the most current cost-of-living adjustments (COLA). As of 2023, the annual contribution limit for a defined contribution plan is $66,000 and the annual compensation limit is $330,000.

Minimum Participation Requirements

As an employer, your organization must meet participation standards to offer this plan. According to the IRS, the minimum requirement for a 401(a) is the lesser of the following:

• Option 1: 50 participating employees
• Option 2: The greater of 40% of all employees, or 2 participating employees

Your organization must be able to meet this requirement on each day of the plan’s year.

Nondiscrimination Testing (NDT)

Nondiscrimination testing (NDT) helps ensure employer-sponsored retirement plans are administered fairly to all employees at any given company. This provision prevents highly compensated participants from receiving favorable treatment over other people and promotes financial equity in the workplace.

While not all tax-favored benefit plans must meet NDT requirements, 401(a) programs are subject to testing.

Vesting Schedule

A vesting schedule based on years of service may be applied to your plan. Vesting indicates employee ownership over the funds in the account, showing how much may be paid to the employee if they retire or leave the company sooner.

Required Minimum Distributions (RMD)

A required minimum distribution (RMD) is the minimum amount participants must withdraw from their retirement account each year. All 401(a) plan participants and designated beneficiaries are required to begin receiving distributions no later than the year the employees’:

• Reach age 73 (see SECURE 2.0 Act)
• Officially retire from work (excluding 5% owners)

Plan Withdrawals

When participants withdraw money from their retirement account, it’s taxed at the usual income rate. However, there are penalties for withdrawing too soon. If the employee receives funds before reaching age 59.5, an additional 10% tax applies.

Consult the IRS for the most current information about 401(a) plan requirements.

Advantages of a 401(a) Plan

Employees contribute to their plans with pre-tax dollars, reducing their overall taxable income. They don’t have to pay taxes on these funds until they retire and begin collecting distributions.

Also, qualified employees with a 401(a) plan may receive a tax credit at the end of the year.

What Is the Difference Between a 401(a) and a 401(k)?

The primary difference between 401(a) and 401(k) plans lies in the employer’s status. Most of the time, private-sector employers offer 401(k) plans. If you work for a government agency, they’ll likely offer you a 401(a) plan and, in certain cases, participation is mandatory. Another notable difference is the number of options available. Common 401(k) plans include:

• Traditional 401(k)
• Safe harbor 401(k)
• SIMPLE 401(k)

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

A 403(b) plan is a tax-sheltered annuity (TSA) plan where the money is invested in annuities or mutual funds. While it’s also for public employees, the main difference is that it's commonly offered as a voluntary benefit by:

• Public schools, colleges, and universities
• 501(c)(3) tax-exempt organizations
• Religious institutions
• Cooperative hospital service organizations

As with other plans, specific contribution limits and other rules may vary.