401(a) vs. 401(k) Plans: Similarities and Differences
Below, we explain how 401(a) plans work with reference to the much more commonly known 401(k) plan. MissionSquare administers governmental 401(k) plans that have been grandfathered by the IRS. The IRS no longer permits new 401(k) plans in the governmental space as of May 5, 1986.
401(a) Plan vs. 401(k) Plan Comparison Chart
The following chart compares the contribution limits for 401(a) plans and private-sector 401(k) plans.
| 401(a) plans | 401(k) plans | |
|---|---|---|
| Maximum Annual Contribution | $69,000 | $23,000 |
| “Age 50 Catch-Up” Limit | None | $7,500 |
| Offered to | Usually to employees of governmental and not-for-profit organizations. | Employees at for-profit companies, and employees of governmental organizations with plans established prior to May 5, 1986. |
401(a) vs. 401(k): Similarities
Both 401(a) plans and 401(k) retirement plans allow participants to contribute a certain amount of their paycheck before it is taxed, reducing their overall income tax burden while working. Those funds then grow tax-free until employees retire and begin to make withdrawals. At that time, the funds are taxed as ordinary income.
In both a 401(a) and a 401(k), participants can begin withdrawing funds at any age if separated from service. Those funds are taxed as ordinary income. Separated employees who withdraw money from a 401(a) or 401(k) before age 59½ are typically subject to a10% early withdrawal penalty, with some exceptions. Some plan sponsors also offer a provision that allows employees to make withdrawals while they are still working for the employer.
Both 401(a) and 401(k) plans are subject to Required Minimum Distributions (RMDs): When participants reach a certain age, they are required to begin making withdrawals from their 401(a) or 401(k) plan. The amount a participant must withdraw depends on how much they have in their account and their life expectancy, among other factors. A plan sponsor can help a participant determine the amount of their RMDs.
The Differences Between 401(a) and 401(k) Plans
While 401(a) and 401(k) plans are both tax-deferred retirement accounts, they differ in key ways.
First, private-sector 401(k) plans are generally only offered to employees at private, for-profit companies, whereas 401(a) plans are typically offered to governmental employees. Since the IRS stopped permitting governmental 401(k) plans in 1986, they are uncommon today.
Second, the plans have very different annual contribution limits. Though contribution limits can change every year, the annual maximum participant contribution for a 401(a) is typically much higher than that of a 401(k).
There are also no catch-up options on a 401(a) plan, whereas a 401(k) has an “Age 50” catch-up limit. Upon reaching age 50, 401(k) participants can contribute more funds to their account every year, beyond the standard annual maximum contribution limits. See the current annual maximum contribution limits.
401(a) plans and 401(k) plans are also funded very differently. In a traditional private-sector 401(k), all contributions are voluntary, and some 401(k) plans may also offer a Roth feature. A participant chooses how much of their paycheck to contribute and in many cases an employer matches a percentage of the employee’s contribution.
For example, if an employer offers a 4% match, and a participant contributes 10% of their paycheck, the employer would contribute, or match, the first 4% of the participant’s pay. If the participant chose to contribute 3%, the employer would contribute 3%, and so on. The participant could contribute nothing at all if they wished.
401(a) plans often have contributions from employers who often require their employees to contribute a set amount as well.
401(a) vs. 401(k) Plans: Which Is Better for Employees?
401(a) and 401(k) plans aren’t really comparable because they’re offered to people in different kinds of organizations: Ordinarily, a person is unlikely to be able to choose between a 401(a) plan and a 401(k) plan.
Whichever plan is offered, MissionSquare recommends that employees take advantage of tax-deferred savings as much as they can to save for a secure retirement.
Start a 401(a) Plan
If you’d like to start a 401(a) plan for your employees, contact us. MissionSquare can also administer your existing 401(k) plan.