# 401(a) Plan: What It Is, Contribution Limits, and Withdrawal Rules

> **Definition**
>
> A 401(a) plan is a retirement savings program created and managed by certain public-sector or non-profit employers, where contribution rules and investment choices are primarily set by the employer. It's generally mandatory for employees to partake.

## What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored money-purchase [retirement plan](https://www.investopedia.com/terms/r/retirement-planning.asp) that allows dollar or percentage-based contributions from the employer, the employee, or both. The sponsoring employer establishes eligibility and the [vesting](https://www.investopedia.com/terms/v/vesting.asp) schedule. The employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.

### Key Takeaways

*   A 401(a) plan is employer-sponsored, and both the employer and employee can contribute.
*   401(a) plans are usually used by government and non-profit organizations.
*   401(a) plans give the employer a larger share of control over how the plan is invested.
*   An employee can withdraw funds from a 401(a) plan through a rollover to a different qualified retirement plan, a lump-sum payment, or an annuity.
*   Investments in 401(a) plans are low risk and typically include government bonds and funds focused on value-based stocks.

![401(a) Plan: An employer-sponsored retirement plan available to employees of government agencies, educational institutions, and non-profit organizations.](https://www.investopedia.com/thmb/lAbqkUDvzBqru0CYBbd4WonRb7A=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/401a-plan.asp-final-0350e5f196e84d0e99699f9d429bd567.png)

*— Investopedia / Ryan Oakley*

## How a 401(a) Plan Works

There are a variety of retirement plans that employers can offer their employees. Each comes with different stipulations, restrictions, and some are better suited for certain types of employers.

A 401(a) plan is a type of retirement plan made available to those working in government agencies, educational institutions, and non-profit organizations. Eligible employees who participate in the plan include government employees, teachers, administrators, and support staff.

A 401(a) plan's features are similar to a [401(k) plan](https://www.investopedia.com/terms/1/401kplan.asp), which is more common in profit-based industries. 401(a) plans do not allow employees to contribute to 401(k) plans, however.

If an individual leaves an employer, they do have the option of transferring the funds in their 401(a) to a 401(k) plan or [individual retirement account](https://www.investopedia.com/terms/i/ira.asp) (IRA).

Employers can form multiple 401(a) plans, each with distinct eligibility criteria, contribution amounts, and vesting schedules. Employers use these plans to create incentive programs for employee retention. The employer controls the plan and determines the contribution limits.

## Contributions for a 401(a) Plan

A 401(a) plan can have mandatory or voluntary contributions, and the employer decides if contributions are made on an after-tax or pre-tax basis. An employer contributes funds to the plan on an employee's behalf.

Employer contribution options include the employer paying a set amount into an employee's plan, matching a fixed percentage of employee contributions, or matching employee contributions within a specific dollar range.

The majority of voluntary contributions to a 401(a) plan are capped at a percentage of an employee's annual pay. For example, an employee may only be allowed to contribute no more than 25% of their pay.

## Investments for a 401(a) Plan

The plan gives employers more control over their employees' investment choices. Government employers with 401(a) plans often limit investment options to only the safest and most secure options to minimize risk.

A 401(a) plan assures a certain level of [retirement](https://www.investopedia.com/terms/r/retirement.asp) savings but requires due diligence by the employee to meet retirement goals.

While this focus on safety can protect employees' retirement savings from significant market downturns, it also limits the potential for higher returns that might be available through more diversified or aggressive investments.

Employees in a 401(a) plan may find their investment growth more modest compared to those in plans with broader investment options, such as a 401(k).

> **Fast Fact**
>
> Employees who contribute to a 401(a) plan may qualify for a tax credit. Employees can have both a 401(a) plan and an IRA at the same time. However, if an employee has a 401(a) plan, the tax benefits for traditional IRA contributions may be phased out depending on the employee's adjusted gross income.

## Vesting and Withdrawals for a 401(a) Plan

Any 401(a) contributions an employee makes and any earnings on those contributions are immediately fully vested.

Becoming fully vested in the employer contributions depends on the vesting schedule the employer sets up. Some employers, especially those who offer 401(k) plans, link vesting to years of service as an incentive for employees to stay with the company.

The [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) subjects 401(a) withdrawals to income tax withholdings and a 10% early withdrawal penalty unless the employee is 59½, dies, is disabled, or rolls over the funds into a qualified IRA or retirement plan through a direct trustee-to-trustee transfer.   

## 401(a) vs. 401(k) Plans

A 401(a) plan is [similar to a 401(k)](https://www.investopedia.com/ask/answers/060215/what-difference-between-401a-and-401k.asp), another type of employer-sponsored plan that provides a tax advantage for retirement investments.

The main difference is who participates: while 401(k) plans are intended for private sector employees, 401(a) plans are directed towards employees of government bodies, educational institutions, and charitable organizations. These plans also tend to offer fewer, more conservative investment options than those found in a 401(k) plan.

If you work in the private sector, you can contribute to a 401(k) plan after one year. But if your employer offers a 401(a) plan, it takes two years.

There are also important rule differences between the two types of plans. [With a 401(k) plan](https://www.investopedia.com/articles/retirement/08/401k-info.asp), participation is voluntary, and the employee can decide how much money to contribute towards the plan, so long as it is below the legal limit. Employers may match a portion of the employee's contribution, but many do not.

However, in a 401(a) plan, employers can make it mandatory for their employees to participate. However, employers are also required to contribute to their employees' accounts. They can also decide whether the 401(a) plan is to be funded with pre-tax or after-tax dollars.

### 401(a) vs. 401(k) plans

401(k)

*   Offered by private sector employers
    
*   Employees become eligible after one year
    
*   Employees elect to participate in the plan
    
*   Employers may match a portion of employee contributions
    
*   More investment options
    

401(a)

*   Offered by government bodies, educational institutions, and charities
    
*   Employees become eligible after two years
    
*   Employers can make participation mandatory
    
*   Employers must contribute to their employees' plans
    
*   Investment options tend to be fewer and more conservative than a 401(k)
    

## 401(a) Plans vs. 403(b) Plans

A [403(b) plan](https://www.investopedia.com/articles/retirement/10/top-9-benefits-403b-plans.asp) is another type of employer-sponsored retirement plan, similar to 401(a) and 401(k). It's specifically designed for employees of public schools, certain tax-exempt organizations, and ministers.

Like the 401(k), the 403(b) allows employees to contribute a portion of their salary to the plan on a tax-deferred basis, meaning taxes on contributions and earnings are deferred until withdrawal, typically at retirement.

One of the distinguishing features of a 403(b) plan is its investment options. Historically, 403(b) plans were limited to offering annuities as investment options, though now they typically offer a range of mutual funds as well.

However, compared to 401(k) plans, the investment choices in 403(b) plans might still be somewhat more limited. Compared to 401(a) plans, 403(b) plans traditionally would have more investment options (though the functionality and offerings under each specific plan may vary).

403(b) plans also share some similarities with 401(a) and 401(k) plans. All three can make tax-deferred contributions and the imposition of penalties for [early withdrawals before](https://www.investopedia.com/articles/personal-finance/111615/how-401k-works-after-retirement.asp) age 59½. Additionally, 403(b) plans often allow for catch-up contributions for employees who have worked for their employer for at least 15 years, offering an extra opportunity to boost retirement savings.

## Tips for a 401(a) Plan

As with other types of retirement plans, it is important to understand the rules and fees associated with a 401(a) before making a significant contribution. This caution can help reduce your costs and expenses further down the line.

Here are some ways to make the most out of a 401(a) or any other tax-advantaged retirement account:

*   **Understand the rules.** As with other tax-advantaged retirement accounts, there are strict rules about what you can do with the money in a 401(a) account. If you take money out before you reach age 59½, you may face a 10% penalty, except for certain emergency expenses. It is important to understand the rules for holding and closing your account to avoid unexpected tax implications.
*   **Understand the fees.** In addition to taxes, there are also fees associated with a 401(a) account that are used to offset the administrative costs of maintaining your investment account. High plan fees can easily eat into your portfolio gains, so it is important to talk to your employer and understand how much the plan will actually cost you.

## Limitations of a 401(a) Plan

The content below was discussed earlier in the article. Let's highlight the downsides of a 401(a) plan all in one section. The downsides to this type of retirement plan are:

*   **Limited employee control**: In a 401(a) plan, the employer typically has significant control over the plan’s structure. This includes the contribution rates and investment options. Employees often have little to no say in how much they contribute or where their money is invested.
*   **Mandatory participation**: Many 401(a) plans require mandatory participation, meaning employees have no choice but to contribute a certain portion of their salary to the plan.
*   **Withdrawal restrictions**: Like other retirement plans, 401(a) plans impose penalties for early withdrawals before age 59½. However, 401(a) plans might have stricter rules regarding when and how you can access your funds.
*   **Employer-specific plans**: 401(a) plans are typically offered by public sector employers, such as government agencies and educational institutions, meaning they are not available to everyone.  
    

## What Happens to My 401(a) Plan When I Quit?

The money in your 401(a) or other employer-sponsored retirement account belongs to you, even after you leave the employer. When you lose your job, that money can be taken as a distribution (with a possible early withdrawal penalty) or rolled into a different retirement account, such as an IRA.

## What's the Difference Between a 401(a) and 403(b)?

A 401(a) plan and a 403(b) are both types of tax-advantaged retirement plans available to certain public-sector employees. Unlike a 401(a), a 403(b) plan is aimed at employees of public schools and tax-exempt organizations, and their investment options are limited to annuities or mutual funds. The main difference is that an employer can make participation in a 401(a) plan mandatory, while it remains voluntary for employees to participate in a 403(b).

## How Much Can I Invest in a 401(a) Plan?

A 401(a) plan does not have the same investment limits as a 401(k) plan. Most plans cap voluntary contributions to 25% of the employee's take-home pay.

## The Bottom Line

A 401(a) plan is a type of tax-advantaged account that allows public-sector employees to save for retirement. These plans typically offer fewer investment options than other types of plans, and they are also relatively low-risk. Although employers can make participation mandatory, there may also be a tax credit for those who contribute to a 401(a).

> **Article Sources**
>
> 1.  Office of the Law Revision Counsel United States Code. "[26 USC 401: Qualified Pension, Profit-Sharing, and Stock Bonus Plan](https://uscode.house.gov/view.xhtml?req=%28title:26%20section:401%20edition:prelim%29%20OR%20%28granuleid:USC-prelim-title26-section401%29&f=treesort&edition=prelim&num=0&jumpTo=true%20-%20substructure-location_f_1)."
>     
> 2.  Internal Revenue Service. "[Retirement Topics - Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions)."