A 401(a) defined contribution plan is a retirement savings plan that allows dollars to accumulate on a tax-advantaged basis for retirement. Contributions may be made by the employer, the participant, or both.
Contributions to a 401(a) plan may be made under one of the following sources:
- Employer contributions — An employer may contribute a fixed dollar or percentage amount.
- Mandatory employee contributions — A plan may require an employee contribution as described above for all eligible plan participants. Mandatory employee contributions are treated on a pre-tax basis.
- Employer matching contributions — The employer may match a fixed percentage of employee contributions.
- Voluntary employee elective contributions — A plan may allow participants to make voluntary contributions on an after-tax basis, limited to 25% of their compensation. Voluntary employee elective contributions are always on an after-tax basis. Employees may benefit from utilizing a 457(b) in lieu of an after-tax 401(a) contribution.
The maximum amount that may be contributed each year to a 401(a) plan account is 100% of the participant’s gross income after subtracting any Section 414(h) pick-up contributions (mandatory employee contributions made with pre-tax dollars), not to exceed an annual dollar limit ($61,000 in 2022) in place for the year. This maximum includes both the participant’s and the employer’s contributions to the account.
Participants may contribute to a 457(b) plan as well as to a 401(a) plan. 457(b) and 401(a) plan contribution limits are separate and dollars contributed to one plan do not reduce the amounts that can be contributed to the other plan.
Participants are always fully vested in their own employee contributions. The employer may establish a vesting schedule for employer contributions to the plan. This vesting schedule determines when the participant acquires “ownership” of the employer contributions (and associated earnings) in the plan. When a participant separates from service, the vesting schedule will determine how much of the account is “owned” by the participant and may be paid to them.
All investment earnings in your 401(a) account accrue on a tax-deferred basis; participants will not pay income tax on pre-tax contributions or earnings until a distribution is taken from the account.
Participants are eligible to withdraw funds from their 401(a) account at retirement, when separating from service, or as a loan, plan permitting. Assets in the plan are held for the exclusive benefit of participants and their beneficiaries and vested amounts can never be forfeited.
Participants are eligible to begin receiving payments from their 401(a) account at retirement or when they leave employment with the current employer. Participants should review several considerations before making a decision about distribution, including:
- Taxes are paid only on withdrawn amounts. Funds that remain in the account, and any future investment earnings, continue to accumulate tax-deferred until they are withdrawn.
- The participant may continue to direct the investment of the assets that remain in the account as allowed by the employer’s plan.
- In the event of the participant’s death, any remaining account balance will be available for distribution to designated beneficiaries.
- Withdrawals prior to age 59½ or your plan’s normal retirement age, whichever is less, may be subject to a 10% early withdrawal penalty from the IRS.
- Withdrawals are subject to a 20% mandatory federal tax withholding if the participant elects to directly receive funds eligible for rollover to another employer plan or an IRA.
The benefits of participation include:
- Reducing your current income taxes while investing for retirement.
- Flexibility to consolidate savings in another qualified retirement plan or a Traditional IRA if participant changes employers. Earnings accumulate tax-deferred.
- Distributions may be exempt from state income tax (varies by state).
- Unlike a 457 Plan, 401(a) plan contributions are not subject to FICA taxes.
- Participants may also participate in a 457(b) deferred compensation plan, if available, with no reduction in contribution limits.
- Flexible payment options are available; you determine the payment schedule and maintain control of your account even after taking distributions.
- In the event of your death, your designated beneficiaries are entitled to receive all remaining vested assets.
- Access to Managed Account Services — Retirement Plan Advisors’ PortfolioPlus Program is a professional asset management service specifically designed for employer-sponsored defined contribution plans. With PortfolioPlus, participants can have increased confidence knowing that they have delegated the fund manager selection and on-going monitoring of their account to the investment professionals at RPA.
Click here to download the 401(a) Retirement Plan PDF.
Click here to contact RPA with questions about your 401(a) Retirement Plan.