Unlocking the Secrets of 401(a) Retirement Plans: What You Need to Know in 2025

While 401(k) plans dominate the retirement savings landscape, the 401(a) plan offers a distinctive alternative primarily utilized by government agencies, nonprofit organizations, and educational institutions. Unlike the more common 401(k), 401(a) plans are highly customizable and often serve as incentives to retain valued employees, sometimes replacing traditional pension plans for public sector workers.

Essential Highlights

• 401(a) plans are predominantly sponsored by public sector employers such as government bodies, schools, and nonprofits.
• Employers have significant flexibility to tailor the plan’s terms and conditions.
• These plans may be selectively offered to specific employee groups to encourage loyalty.
• Enrollment in a 401(a) plan is frequently required, though active participation might not be mandatory.
• While similar to 401(k) plans, 401(a) plans are more common in the public sector and differ in contribution structures.

The IRS bases the 401(a) plan regulations on Section 401(a) of the tax code, aligning closely with rules for 401(k) plans, which are a subset of this section. The 401(a) plan can take various forms, including profit-sharing, money-purchase pension plans, or employee stock ownership plans.

These plans share similarities with 403(b) tax-sheltered annuities, and plan administrators must file annual Form 5500 reports with the IRS to maintain compliance.

2024 Contribution Limits for 401(a) Plans

In 2024, the IRS has set the maximum contribution limit for 401(a) plans at $69,000 or 100% of an employee’s salary, whichever is less—an increase from the $66,000 limit in 2023.

Contributions can originate from multiple sources such as:

• Employer contributions based on fixed amounts or salary percentages.
• Employer matching contributions.
• Mandatory employee contributions made on a pre-tax basis.
• Voluntary after-tax employee contributions, capped at 25% of total salary.

Withdrawal Rules and Required Minimum Distributions (RMDs)

Participants withdrawing funds before age 59½ face a 10% early withdrawal penalty, consistent with most retirement plans. Additionally, mandatory RMDs begin at age 73, reflecting recent legislative changes under the SECURE Act and SECURE 2.0 Act, which raised the RMD age from 70½ to 73.

Important Consideration

Employees enrolled in a 401(a) plan are generally not permitted to participate simultaneously in a 401(k) plan.

Who Sets the Rules for 401(a) Plans?

The sponsoring employer largely dictates the specific terms of a 401(a) plan given its customizable nature. This includes decisions on investment options, whether employee contributions are voluntary or mandatory, contribution amounts, employer matching policies, and whether contributions are pre-tax or after-tax.

Comparing 401(a) and 401(k) Plans

Unlike 401(k) plans, where contributions by employees and employers are optional, 401(a) plans often require regular contributions from both parties. 401(a) plans are primarily offered by government and nonprofit employers, whereas 401(k) plans are widespread in the private sector. Contribution limits also differ significantly: for 2024, the 401(k) contribution limit is $23,000 (or $30,500 for those 50 and older), while the 401(a) plan allows up to $69,000.

Conclusion

The 401(a) plan is a versatile, employer-sponsored retirement savings vehicle tailored mainly for public sector employees. With a 2024 contribution limit of $69,000, it provides a valuable opportunity for retirement planning beyond traditional 401(k) options. For personalized guidance, employees should consult their employer or plan administrator to understand their specific 401(a) plan details.

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