What Is a 401(a) Plan?

Definition and Examples of 401(a) Plan

A 401(a) plan is a qualified retirement plan as defined by Section 401 of the Internal Revenue Code. These plans can be offered by public employers, including government entities, educational institutions, and nonprofit organizations. Both employers and employees can make contributions to this type of retirement plan.

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

A 401(a) money purchase plan must state the contribution percentage the employer is required to make. Here's an example of how that works.

Say your employer's plan specifies a 5% contribution rate, based on each eligible employee's pay. Your employer would have to contribute 5% of your pay to your 401(a) account on your behalf. So if you make $100,000 a year, your employer would have to contribute $5,000 to your 401(a) account.

How a 401(a) Plan Works

A 401(a) plan is designed to help employees accumulate savings for retirement on a tax-advantaged basis. It's possible to contribute to a 401(a) and a 457(b) plan or individual retirement account (IRA) at the same time.

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

• When employees are enrolled
• Which employees are eligible to enroll
• Whether employee contributions are voluntary or mandatory
• Whether to offer an employer matching contribution
• When employees become vested in the plan
• Which investments to offer
• Whether to allow loans

If you're eligible for a 401(a) plan at work, you may be able to make elective deferrals from your paychecks. Your employer could make deferrals voluntary or mandatory, or in some cases, the employer may not allow employee contributions at all.

The IRS caps contribution limits for these plans at the lower of 25% of compensation or $58,000 for 2021. This limit includes both employee and employer contributions. There's no catch-up contribution allowed.

In terms of what you can invest in, 401(a) plans can offer many of the same choices as 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 a self-directed option 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 mutual fund alternatives, such as real estate.

A 401(a) plan follows the same withdrawal rules as a 401(k) plan. Penalty-free withdrawals can be made starting at age 59 ½, but you'll still owe regular income tax on them. You're not required to begin taking withdrawals until age 72 under required minimum distribution rules. Early withdrawals are generally not permitted, although some employers may allow you to take out a 401(a) loan.

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

A 401(a) plan and a 401(k) plan both allow employees to save for retirement on a tax-advantaged basis. They have similar tax treatment and both can offer the same range of investment options. Employers can choose to offer matching contributions with either type of retirement plan when employees also contribute.

Where the two types of retirement plans differ largely lies in how much control employers have over the terms of the plan and the annual contribution limits. Here's a brief look at how 401(a) plans and 401(k) plans compare.