What Are the IRS Guidelines on the 401(a)?

While most Americans are familiar with 401(k) plans as retirement-saving vehicles, there are lesser-known retirement and benefit plans. One example is the 401(a) plan, typically offered by not-for-profits, government agencies, and educational institutions, as opposed to private companies. These plans can be customized by the employer and are often offered as a loyalty incentive. In some cases, public employees may be given 401(a) plans in lieu of government pensions.

The Internal Revenue Service (IRS) draws upon Section 401(a) of the tax code to formulate rules for the administration of 401(a) plans. These rules are similar to rules set for 401(k) plans, which is a subset of section 401(a).

A 401(a) plan can take many shapes. They can be a profit-sharing plan, money-purchase pension plan, or employee stock ownership plan. The employee contribution amounts are governed by the employers, who must also contribute to the program. Contributions can either be made on a pre-tax or post-tax basis.

A 401(a) plan resembles a 403(b) tax-sheltered annuity plan. Administrators of 401(a) plans must file Form 5500 reports annually with the IRS.

Specific IRS Guidelines

As of 2023, the maximum allowable contribution to a 401(a) plan is $66,000 or 100% of salary, whichever is smaller. This is up from $61,000 in 2022, and these figures exclude the $7,500 potential catch-up for certain participants.

As with most other retirement plans, participants who withdraw from their 401(a) prior to reaching 59½ must pay a 10% early withdrawal penalty. Also, they must begin taking required minimum distributions (RMDs) upon reaching a specific age. Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the age had increased to 72 from the previous RMD age of 70½. Then, Congress passed the SECURE 2.0 Act, increasing the RMD age to its current level of 73 years old.

Contributions to 401(a) plans can come from a variety of sources, including:

• Employer contributions that are a fixed dollar amount or salary percentage.
• Mandatory employee contributions made on a pre-tax basis.
• Employee contributions that are elective and made on an after-tax basis, up to 25% of total salary.
• Employer matching contributions.

Who Dictates the Terms of a 401(a) Plan if Not the IRS?

In some cases, because 401(a) plans are so customizable, the terms and conditions are dictated by the sponsoring employer, rather than by specific IRS guidelines. For example, in addition to delineating the investment options available in these plans, employers govern whether employee contributions are voluntary or mandatory, the amount of each employee's contribution, the degree to which that contribution is matched by employer funds, and whether contributions can be made with pre-tax or after-tax dollars.

The Bottom Line

A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows contributions from the employer, the employee, or both. This type of retirement plan is commonly seen in the government and nonprofit sector, and enrollment in a 401(a) plan is often required for employees.