What is a 401(a)?

If you’re employed by a governmental, nonprofit, or educational institution, you might see something called a 401(a) plan listed in your employee benefits package. This is not to be confused with the more common 401(k) retirement savings plan. Here are the ins and outs of a 401(a) and how it could help prepare you for a financially secure future.

What is a 401(a)?

A 401(a) is a retirement account sponsored by an employer that primarily houses contributions made by the employer. These contributions are normally non-elective, which means they are made whether the employee chooses to make contributions themselves or not. They can also be elective or “match” contributions that employees must first contribute themselves to receive.

How does a 401(a) work?

As the name implies, a 401(a) plan comes from Internal Revenue Code section 401(a) and serves as the building block that powers retirement savings for many people, including through profit-sharing plans, money purchase plans, and 401(k) plans.

Technically, 401(k)s are a type of 401(a). But in for-profit companies, rather than have a separate 401(a) that holds employer profit-sharing contributions, all employer-sponsored retirement plan funds are typically presented to participants as one vehicle: a 401(k).

Nonprofits, governmental agencies, and educational institutions, meanwhile, may choose to keep things separate, with 401(a)s housing employer contributions and 403(b)s keeping employee contributions (though 403(b)s can also receive employer contributions). Keeping separate accounts like this may allow employees to contribute more to their retirement savings than a 401(a) plan alone, which we cover more below.

How do 401(a) contributions work?

If you have a 401(a), you may see it labeled as a profit-sharing or money purchase plan. Profit-sharing plans allow employers to distribute a set amount of funds to eligible employees based on a distribution formula they pick. Money purchase plans, meanwhile, require employers to commit to a set contribution percentage of eligible employees’ incomes each year. In either case, your 401(a) is letting your employer contribute to your retirement savings.

Even though your employer may make annual contributions to the plan on your behalf, your level of ownership of those contributions is dependent upon the plan’s vesting schedule. A vesting schedule shows how much of your account balance you actually own and is usually communicated in ownership tiers that increase gradually over time. For example, after 2 years of employment or service with your employer, you may own 20% of your employer’s contributions. After your third year of service, your ownership level may increase to 40%—and so on—until it reaches 100%.

Depending on your employer, your 401(a) may allow for employee contributions also. If these are allowed, they may be mandatory.

An important note about the tax treatment of contributions: When an employee contributes their own money to a 401(a) plan, it’s made on an after-tax basis. However, when an employer contributes to the plan on behalf of its employees, it’s made on a pre-tax basis.

If you work for a government agency, you may have the opportunity to contribute on a pre-tax basis if your employer agrees to “pick up” your contribution—or after-tax contributions may be mandatory as a condition of your employment. Check with your benefits provider to see what savings opportunities you may have. The type of contribution made may impact how account withdrawals are taxed, which we cover later.

Advantages of a 401(a)

A 401(a) plan can be a valuable retirement savings tool. Here are the biggest benefits to you as an employee.

Employer contributions

Contributions are made by the employer on your behalf, which helps to increase your retirement readiness on a pre-tax basis; any earnings also grow on a tax-deferred basis. This provides greater flexibility with how you use your personal income to work toward meeting your short-, mid-, or long-term financial goals.

But make sure to account for any vesting schedule that may apply to employer contributions when you’re crafting your financial plan. The value of your account may compound over time, even before you’re fully vested.

Your employer may combine a 401(a) with another type of retirement plan, like a 403(b) or 457(b). This would allow you as the employee to save the maximum amount in those accounts while your employer also contributes to at least one of those plans on your behalf.

Compounding

Compound interest is when interest earns interest of its own. This may help your money to work for you and may make it easier to reach your financial goals. Please note, compounding does not ensure a profit or protect against loss in declining markets.

While your employer chooses which investment options are available in your 401(a) plan, it’s up to you to make sure that your contributions are invested in a position for potential growth over time.

401(a) contribution limits for 2024

The maximum amount that can be contributed to your 401(a) account in 2024, including employer and employee contributions, is $69,000. This amount adjusts annually to account for the cost of living.

Another factor: The amount of compensation that can be taken into consideration when determining how much your employer may contribute toward your 401(a) plan is limited to $345,000 in 2024. This is also adjusted annually for the cost of living.

If a 401(a) plan is combined with another plan, like a 403(b) or 457(b), your employer may be able to contribute the federally allowable maximum to a 401(a) as well as the federally allowable maximum (minus any contributions you make) to your other employer-sponsored retirement account.

401(a) plan withdrawal rules

Since a 401(a) plan is a retirement account, it’s smart to keep funds in there for the long haul. 401(a) plans may allow for withdrawals upon hitting age 59½, or after certain events, like death, disability, hardship, or upon separation from the sponsoring employer. Generally, any amount withdrawn before age 59½ is considered an early distribution and may be subject to a penalty, in addition to normal taxation.

Still, you can’t keep funds in your 401(a) indefinitely. Once you reach a stated age (usually 73), you must start taking at least a minimum amount from your retirement account. This is called a required minimum distribution (RMD) and is typically unavoidable unless you’re still working for the company that holds your 401(a) when you reach that age.

401(a) vs. 403(b)

As mentioned above, a 401(a) and a 403(b) may be paired together as part of your retirement offering. Because employers decide which plans are offered, you likely will not be able to choose whether your available retirement vehicle is a 401(a), a 403(b), or both.

That said, here are the high-level similarities and differences between a 401(a) plan and a 403(b) plan.

401(a) vs. 401(k)

Your employer decides whether you are offered a standalone 401(a) or a 401(k) that combines employee and employer contributions enabled by a 401(a). Usually, private sector companies offer 401(k)s while those in the nonprofit or governmental space may use separate 401(a)s to hold employer contributions.

The main difference between 401(a)s and 401(k)s is that 401(k)s allow employees to make contributions with pre-tax dollars. 401(a)s may allow for employee contributions, but if they do, they will be with after-tax dollars—and may be required contributions. How much or how little you contribute to a 401(k), meanwhile, is your choice.

These are high-level similarities of and differences between 401(a)s and 401(k)s.