401(a) Plan

What Is A 401(a) Plan?

A 401(a) plan is a company-sponsored retirement account that allows the company, the employee, or both to contribute cash or percentage-based contributions.

This plan is available to government and nonprofit employees. 401(a) plans have high contribution limits and offer various investment options. Moreover, it also offers attractive tax benefits.

The sponsoring employer determines the vesting timeline and eligibility. A rollover to another eligible retirement plan, a lump-sum payment, or an annuity are all options for withdrawing assets from a 401(a) plan.

How it Works

401(a) plans are sponsored by employers and funded through employee salary deferrals. Employees can choose to contribute a percentage of their salary or a set dollar amount to their 401(a) plan, or employers can make matching or discretionary contributions.

Assets are held in an account in the employee's name and invested according to the employee's investment instructions. 401(a) plans have high contribution limits and offer a wide variety of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

If you're not sure if a 401(a) plan is the best fit for your business, explore sustainable 401(k) plans and use the 401(k) plan comparison tool. 

Eligibility

401(a) plans are available to government and nonprofit employees. Here are the eligibility requirements for 401(a) plans:

Mandatory Participation

• Employees must be at least 30 years old.

• Employed in a regular budgeted position.

• Completed two years of service.

• Employment status equal to 0.5 full-time equivalency (FTE) or greater.

Voluntary Participation

• Employees between the ages of 26-29.

• Employed in a regular budgeted position.

• Completed two years of service.

• Employment status equal to 0.5 full-time equivalency (FTE) or greater.

Employees who decline voluntary participation when it is first offered may not participate until the required participation standards are met.

Employees who meet the eligibility requirements, except for the two-year service requirement, may join if they can demonstrate qualifying service with a former company whose principal purpose or activity provided an organized education program.

401(a) Features

The following features are typically found in 401(a) plans:

Contribution

Under section 415(c)(1)(A), the total contribution maximum for 401(a) defined contribution plans rose from $61,000 in 2022 to $66,000 for 2023. This comprises contributions from both the company and the employee.

Contributions to a 401(a) plan can be mandated or optional, and the employer determines whether contributions are paid after-tax or pre-tax. An employer makes a contribution to the plan on behalf of an employee.

Employer contribution choices include contributing a certain sum into an employee's plan, matching a given percentage of employee contributions, or matching employee contributions up to a certain monetary amount.

The majority of 401(a) plan voluntary contributions are limited to 25% of an employee's yearly salary.

Investment Options

You have a choice over how your account is invested, using alternatives chosen by your company.

A typical plan contains a variety of alternatives, ranging from cautious stable value funds to more aggressive bond and equity funds.

You have the option of constructing a diversified portfolio of multiple funds, selecting a basic yet diversified target-date or target-risk fund, or relying on specialist investing guidance.

Vesting

401(a) plans have a vesting schedule that determines when an employee can access the employer's contributions. Vesting schedules can be either immediate or gradual.

Immediate vesting means that employees are 100% vested in the employer's contributions from the start.

Gradual vesting schedules have different vesting percentages for each year of service, with employees typically becoming fully vested after five or six years.

Withdrawal

When you quit your job, you are free to withdraw funds from your account as you see fit, but you usually are not obligated to do so until you reach the age of 73.

You have the freedom to withdraw funds as required, including the option to have payments automatically placed into your bank account each month.

Withdrawals are normally taxed, and an IRS-imposed 10% early withdrawal penalty may apply to payments made before the age of 59 ½. 

While you are working, your withdrawal options are limited and vary per plan. Options may include the opportunity to withdraw voluntary after-tax contributions at any time or after reaching a specified age (e.g., 59 ½, 73, or the plan's Normal Retirement Age). You may also be able to take out a loan against your account.

Benefits of 401(a) Plan

401(a) plans offer a variety of benefits, including:

• Reducing current income taxes while saving for retirement.

• If members move jobs, they can consolidate their funds in another qualifying retirement plan or a Traditional IRA. Earnings compound tax-free.

• State income tax may not apply to distributions (varies by state).

• 401(a) plan contributions, unlike 457 Plan contributions, are not subject to FICA taxes.

• If one is available, participants may also enroll in a 457(b) deferred compensation plan, with no contribution restrictions reduced.

• Flexible payment choices are available; you choose your payment schedule and retain control of your account even after payouts are made.

• The "use it or lose it" provision that applies to other employer-sponsored retirement plans, such as 401(k)s, does not apply to 401(a) plans.

• Your selected beneficiaries are entitled to all remaining vested assets in the case of your death.

Conclusion

401(a) plans are employer-sponsored retirement savings plans that offer a variety of benefits, including tax breaks, to employees. It has a vesting schedule, immediate or gradual, that determines when an employee can access the employer's contributions.

The plan is not subject to the "use it or lose it" rule that applies to other employer-sponsored retirement plans, such as 401(k)s. Your selected beneficiaries are entitled to all remaining vested assets in the case of your death.

401(a) plans are a great way to save for retirement because they offer many benefits that other retirement savings plans do not.

FAQs

1. What is a 401(a) Plan?

It is an employer-sponsored retirement savings plan that offers a variety of benefits, including tax breaks, to employees.

2. How does the 401(a) plan work?

401(a) plans are sponsored by employers and funded through employee salary deferrals. Employers may also make contributions to employee accounts.

3. Who is eligible for a 401(a) Plan?

To be eligible for a 401(a) plan, you must be an employee of a company that offers this type of plan for two years. Moreover, you must be at least 30 years old.

4. What are the benefits of the 401(a) Plan?

401(a) plan includes reducing current income taxes while saving for retirement, consolidating funds in another qualifying retirement plan or a Traditional IRA, and having earnings compound tax-free.

5. Are 401(a) plans subject to the "use it or lose it" rule?

No, 401(a) plans are not subject to the "use it or lose it" rule that applies to other employer-sponsored retirement plans, such as 401(k)s.

6. What happens to 401(a) plan assets in the case of death?

In the case of death, your beneficiaries are entitled to all remaining vested assets.