An employer-sponsored retirement plan that takes contributions from the employee and/or the employer.
The 401(a) plan is employer-sponsored, meaning that the employer usually has more control over managing the plan. Employers have the freedom to construct the eligibility criteria for the plan and the vesting period -- the schedule that determines when an employee is fully eligible to receive the awarded money. For instance, to get the full benefit of the employer’s contribution to the plan, an employee must have met the minimum years of service requirement. Employers implement vesting periods to promote loyalty to the company.
Employers have control over the plan’s investment decisions. If the accrued compensation from the 401(a) plan is invested, employers typically put safety as the priority by choosing low-risk options. This ensures that the employee receives the appropriate amount of compensation at the time of the withdrawal. The amount of periodical contributions from both the employee and/or the employer is also often limited, monitored by the Internal Revenue Service (IRS). Combined, the total annual contributions from both the employee and employer are no more than $58,000 (for the year 2021).
As for the employee’s specific amount of contribution, the employer often decides the amount. Using this number, the employer can match the amount of its contribution according to the employee’s contribution fixed percentage or specific dollar range. Furthermore, the employer determines if the tax associated with the plan is paid during the periodical fund addition or at withdrawal.
Example of a 401(a) Plan
Cindy is a teacher and 401(a) plan participant. Her employer has the right to make Cindy set aside a certain amount of her monthly income as accrued compensations, which will be withdrawn at her retirement.
Her employer contributes to the plan based on the fixed percentage of Cindy’s contribution. To get the full benefit of her employer’s contribution, Cindy needs to work for the institution for at least 15 years. Also, to avoid penalties, she can’t make a withdrawal from the plan before the predetermined time.
Significance of the 401(a) Plan
Employees may withdraw the funds from the 401(a) plan after his/her age reaches 59.5 years old. An employee can either transfer the withdrawn money to another retirement plan if the employee changes job, if they roll it over to their Individual Retirement Account (IRA), or if it is paid in a lump-sum, or given as a series of payments. In this case, the employee can choose how they will use the retirement money.
To avoid potential penalties, employees can only withdraw after the scheduled period, and the employers’ contribution is fully vested. If the employee makes early withdrawal due to a certain reason (e.g., early retirement), they will usually get a 10% fee unless it is withdrawn under certain conditions (dies, disabled, etc.).
As with other retirement plans, 401(a) plans are only available for only certain employees. Those who work for the government, educational establishments, and non-profit institutions are usually the ones who are eligible for these types of plans. Meanwhile, private-owned, profit-based companies offer 401(k) Plans instead.