While most people are familiar with the 401(k) retirement plan provisions, many are not as aware of the nearby section of the Internal Revenue Code in 401(a). While the (k) retirement plans are typically sponsored by private companies, a 401(a) is generally established by a non-profit organization, a non-federal government agency, or an academic institution. Sometimes these organizations will set up a 403(b) plan instead of a 401(a). In either case, the sponsoring organization can determine the eligibility requirements and compel participation, but there are differences.
If your employer offers a 401(a) plan, it must contribute, unlike a 401(k), which many companies voluntarily contribute toward. The amount that the employer and employee together can contribute to a 401(a) is limited to $58,000 annually, beginning in January of 2021. The annual contribution amount may not exceed your total salary. The employer decides what the contribution level will be, the vesting period, and whether contributions are made pre- or post-tax. Often the employer will set these parameters to provide an incentive for the employee to remain with the organization. The plan will have fewer investment options than the more prevalent 401(k) plans, and often the choices are limited to safer, more conservative vehicles.
The employer has some alternatives in how the employee participates in the 401(a) plan:
- The employer contributes a portion of your pay to the fund. You don’t take any action, and you pay taxes on withdrawals after retirement.
- The employer directs a portion of your pay to the fund. The difference between this and the first option is that the contribution amount is deducted from your income, but you cannot opt out.
- The employee makes an irrevocable election to contribute a percentage of income on a pre-tax basis or to abstain permanently.
In any of these arrangements, the amount contributed to the 401(a) plan does not diminish the amount available for election to a 401(k) or 403(b) plan. The reason for this is that these contributions are not considered elective (even the one-time decision, because it is irrevocable), so an employee can contribute across other available platforms.
- The final variation is less common and involves after-tax contributions that you can start, end, increase, and reduce at will, like participation in a typical 401(k) or 403(b) plan. Since you make these elective contributions after taxes, the withdrawal of contribution amounts are not taxed, but earnings are.
Like a 401(k) plan, employees can borrow from the 401(a) if the specific program allows loans (this is up to the employer who determines the plan parameters). There are similar limits, including the maximum loan of half the value or no more than $50,000. Like a 401(k) loan, you borrow from yourself and pay interest to yourself, but the actual cost is in the opportunity for earnings that are lost while the money is not in the account, growing. You must repay the loan within five years (extended terms are possible if the loan is related to the purchase of a principal residence), or the loan converts to a withdrawal and becomes taxable.
