Among the alphabet soup that describes the defined contribution world, 401(a) plans are among the lesser known. The 401(a) primarily covers government employees, including those employed by schools and universities.
While it could serve as an employer’s sole retirement plan, the 401(a) is often offered along with another plan, like a 403(b) or 401(k). You’ll see why shortly!
Like the 401(k), a 401(a) is set up by the employer. But while there are other similarities between the two types of plans, the 401(a) can be far less flexible for both the employer and employees. That’s because employer contributions to the plan are mandatory. These contributions may be made as a percentage of salary or a fixed dollar amount.
Another big difference between the 401(a) and the 401(k) is that the employer decides if employees are even allowed to contribute to the 401(a) plan. In fact, the employer can determine that employee contributions will be mandatory. In that case, a new employee is signing on to contribute to the plan at predetermined amounts.
The employer does have the discretion to allow voluntary employee contributions, and the employer can determine whether or not to match those employee deferrals. In a 401(a) plan, mandatory employee contributions are made with pretax dollars. But voluntary contributions, if allowed, are made on an after tax basis. In that case, some distributions will be taxable while others will not.
401(a) plans: supplements to other retirement plans
The 401(a) seems less strange when viewed as a supplement to another retirement plan, like a 401(k) or 403(b). In fact, employee and employer contributions to a 401(a) don’t count against the contribution limits imposed by the 401(k) or 403(b). The 2018 employee and total combined contribution limits for the 401(a) are $18,500 and $55,000 respectively, just as with the more traditional plans. When used in combination, the pair can provide for significant tax deferrals.
In reality, there’s no guarantee that an employee will max out both types of plans since an employer would need to contribute enough to each to make that possible. And remember, it is common for the employer offering the 401(a) plan to determine the level of employee contributions. This discretion means that an employee may or may not have the chance to contribute the full $18,500 in the 401(a).
A 401(a) plan can also be designed only for certain employees, perhaps as a retention or recruitment incentive. An employer may even create different 401(a) plans to cover different groups of employees. With this aspect of 401(a) plans in mind, all those quirks make a little more sense.
This sounds familiar
Despite some of its strange attributes, 401(a) plans boast familiar traits as well. For example, employer contributions may require a vesting period before employees acquire ownership of the assets. Like the 401(k), vesting can take the form of cliff vesting (where 100% ownership is attained after a period of years) or graded vesting (where ownership is gradually attained over time).
And like the more traditional plans, funds must remain in the 401(a) until the participant is 59 ½. Otherwise a 10% penalty will be imposed. Similarly, participants must begin taking required minimum distributions at age 70 ½.
Investment options also may be similar to those in the 401(k). But employers offering a 401(a) plan should carefully evaluate the fees associated with the investment options. These plans are far less common than a traditional 401(k) or 403(b), but providers should be compared to the competition, just as when evaluating 401(k)/403(b) providers.
Bottom line, the 401(a) is much less than common than the 401(k), and when offered, is often a supplement to one of the more traditional retirement plans:
|## **401(a) vs 401(k) Comparison**|
|2018 Combined Contribution limit||$55,000, not limited by 401(k) contributions||$55,000|
|Catch up provision||$6,000||N/A|
|Employee contribution||May be mandatory or voluntary||Voluntary up to $18,500|
|Employer contribution||Mandatory||Matching or discretionary|
|Early withdrawal penalty||Yes||Yes|
|Required minimum distribution||Yes||Yes|
**How is your 401(k) or 403(b)? **
The differences between various retirement plans can be hard to understand. Even deciding whether to offer a 401(k) or 403(b) can be a challenging and time-consuming exercise. Differences between the two plans can include eligibility as well as compliance differences. You can learn more about the differences between the 401(k) and the 403(b) in our article about the differences between a 401(k) and 403(b) plan. Or give us a ring to discuss which option works best for you.
If you already offer a retirement plan and want to learn more about administrative and investment duties that can be outsourced, including employee education and investment options, schedule a time to talk with ForUsAll today.