What is a 401(a) plan?

Definition and Examples of a 401(a) Plan

How a 401(a) Plan Works

401(a) Plan vs. 401(k) Plan

Definition and Examples of a 401(a) Plan

A 401(a) plan is a type of qualified retirement plan that public employers can offer. Both employers and employees can make contributions to a 401(a) plan.

401(a) plans are considered a type of money purchase plan. With a money purchase plan, the account values depend on contributions made and the gains or losses achieved by the plan’s investments. Employers are required to make contributions to the money purchase plans on behalf of employees, while employee contributions are optional.

A 401(a) money purchase plan must specify the contribution percentage that the employer must provide. Here is an example of how this works.

Suppose your employer’s plan specifies a contribution rate of 5%, based on the salary of each eligible employee. The employer would need to contribute 5% of your salary to your 401(a) plan account. So, if you earn $100,000 a year, the employer must contribute $5,000 to your 401(a) plan account.

How a 401(a) Plan Works

The 401(a) plan aims to help employees accumulate savings for retirement on a tax-deferred basis. You can contribute to a 401(a) plan and a 457(b) plan or an Individual Retirement Account (IRA) at the same time.

The IRS allows employers to set the basic terms of the plan, including:

• When employees are enrolled
• Which employees are eligible for enrollment
• Whether employee contributions are optional or mandatory
• Whether an employer matching contribution is offered
• When employees become vested in their benefits under the plan
• What investments are offered
• Whether loans are allowed

If you qualify for a 401(a) plan at work, you may be able to make optional contributions from your salary. The employer can make contributions optional or mandatory, or in some cases, the employer may not allow employee contributions at all.

The IRS sets the maximum contribution limits for these plans at 25% of salary or $58,000 for 2021. This limit includes both employee and employer contributions. No additional contributions are allowed.

Regarding available investments, 401(a) plans can offer many of the same options available in 401(k) plans or other qualified retirement accounts. For example, you may be able to invest in:

• Target date funds
• Index funds
• Exchange-traded funds (ETFs)

Employers can also offer self-directed investment options for 401(a) plans. This is typically done through a connected self-directed brokerage account. The advantage of a self-directed account is that you may be able to invest in alternatives to mutual funds, such as real estate.

A 401(a) plan follows the same withdrawal rules that apply to a 401(k) plan. Funds can be withdrawn without penalties starting at age 59 and a half, but you will be required to pay regular income taxes on them. You are not required to start withdrawing funds until age 72 under the required minimum distribution rules. Generally, early withdrawals are not allowed, although some employers may allow you to take a 401(a) loan.

Note: If you take a 401(a) loan and leave your employer, the entire amount may be treated as a taxable distribution if it is not repaid in full.

401(a) Plan vs. 401(k) Plan

Both the 401(a) plan and the 401(k) plan allow employees to save for retirement on a tax-deferred basis. They have similar tax treatment and both plans can offer the same range of investment options. Employers can choose to provide matching contributions with any type of retirement plan when employees also make contributions.

Note:

If you leave your employer, you can roll over your 401(a) plan to avoid any early withdrawal taxes.

The main difference between the two retirement plans lies in how much control employers have over the plan’s terms and the annual contribution limits. Here’s a brief look at how 401(a) plans compare to 401(k) plans.

401(a) Plan	401(k) Plan
Offered by public employers	Offered by private employers
Employers can determine whether employee contributions are allowed and how much employees can contribute	Employees decide whether they want to make optional contributions from their salaries to the plan
Usually does not allow hardship withdrawals, although loans may be an option	Can offer hardship withdrawals as well as loans

Source: https://www.thebalancemoney.com/what-is-a-401-a-plan-5196441