A 401(a) is a pension plan for employees of federal, state, local or tribal governments. The plans were created under Internal Revenue Code Section 401(a). Specific features, benefits and rules vary depending on the type of plan and the employer.
Money Purchase Plan
A money purchase plan is a defined contribution plan, which means that the employer sets aside a certain percentage of money each year to deposit into the employee's pension account. The retirement benefit will depend upon the balance in the account at the time of retirement -- deposits plus investment performance. The employer determines contribution rules. The most common scenario, according to the financial services firm ICMA-RC, includes a combination of employer and employee contributions. Employer contributions can be a fixed percentage of an employee's salary or a match of the employee contribution. Employee contributions may be made by either pre-tax or after-tax dollars, depending on the plan. The employee makes investment choices from a range of options, including stocks, bonds, CDs, and mutual funds.
The IRS limits total annual contributions, as well as the amount of compensation that can be taken into account for contribution purposes. As of this publication, this maximum annual amount is $265,000. Employers also may establish a vesting schedule, which determines how many years of service you must have in order to be entitled to the employer contributions and associated earnings.
IRS rules say you must begin making withdrawals from the account by age 70 1/2. You also can make withdrawals when you leave your employer, although they may be subject to taxes. Withdrawals and loans may be allowed while still employed, depending on employer and IRS rules.
A 401(a) profit sharing plan works similarly to a money purchase plan, except that employers have discretion about whether or not to contribute. For example, an employer may contribute in years in which profit exceeded budget goals, but avoid contributing in more financially challenging years. Like the money purchase plan, the benefit at retirement depends on how much is in the account -- deposits, as well as investment performance. Some profit-sharing plans allow employee contributions, while others do not.
Defined Benefit Plan
In a defined benefit 401(a) plan, retirement benefits are based upon a formula that typically takes into account age, years of service and salary history. Employees do not contribute to a defined benefit plan. Nor do they have a say in investment choices. Employers establish vesting periods before employees are eligible to claim any pension at retirement.
- ICMARC: 401(a) Defined Contribution Plans
- IRS: Governmental Plans under Internal Revenue Code Section 401(a)
- Fidelity Investments: Glossary
- IRS: A Guide to Common Qualified Plan Requirements
- Employee Benefit Research Institute: Profit-Sharing Plans:
- Women's Institute for a Secure Retirement: Why You And Your Spouse Need To Know About Survivor's Benefits