401(a) Plans – a Flexible Retirement Plan for Government Employees

What is a 401(a) plan?

A 401(a) plan is a defined contribution retirement plan for governmental employees, as well as employees of certain educational institutions and nonprofits. 

401(a) vs 401(k)

As with a 401(k) plan, both the employer and the employee may make contributions into a 401(a) plan. The employer sponsoring a 401(a) plan sets the vesting schedule and determines the plan’s investment options, but the employees choose which option(s) to use. Employee contributions always vest immediately. All plan contributions accrue tax deferred. 

Unlike with a 401(k) plan, how contributions are made to a 401(a) plan is determined by the employer, and can be done as a fixed dollar or percentage amount by the employer, a mandatory employee contribution,  employer matching contributions, and/or voluntary employee after-tax elective contributions of no more than 25% of compensation. Typically, employers contribute a set amount into the plan or match a percentage of each eligible employee’s contributions. If the employer elects to contribute on behalf of employees, the employer must do so for all eligible employees, even if an employee does not voluntarily contribute to the plan. Employers can set up multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts and vesting schedules for the employer contributions.

401(a) plan contribution limit

For 2020, the total amount that may be contributed to a 401(a) plan for an employee is the lesser of 100% of the employee's salary or $57,000, including employer and employee contributions.

401(a) withdrawal rules

401(a) rollover

When employees leave a 401(a) plan employer, they can roll over their plan assets to a different retirement plan or take a lump-sum payment.

401(a) distributions

401(a) plan distributions are subject to the 10% early distribution tax unless the employee is age 59½ or meets another exception. These plans are also subject to the required minimum distribution (RMD) rules. 

Benefits of a 401(a) plan

Governmental entities are not permitted to establish a 401(k) plan, so establishing a 401(a) plan is one way that governmental employers can help their employees save for retirement. Employees participating in a 401(a) plan may not also contribute to a 401(k) plan; however, they can contribute to a 457(b) plan. It is common for a 401(a) to be paired with a 457(b) governmental plan, similar to a 401(k) Profit Sharing plan. The contribution limits for 401(a) and 457(b) plans are separate so employees can contribute the full amounts allowed under each plan. Since plans can be set up to require mandatory employee contributions, some employees may find such plans to be economically burdensome. 

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