401a Plan

Increasingly popular with major companies and participants, 401a plans offer flexibility and value for employees planning for retirement. Because these plans vary widely, there is no single 401a definition; generally, however, 401a money purchase plans are defined as defined-contribution retirement plans. Originally designed and conceived to be retirement plans for teachers, the 401a name derives from the section of Internal Revenue Service legal code that made these versatile retirement plans possible.

401a Plans and 457 Plans

When combined with an existing 457 plan, a 401a plan offers unique advantages to participants. The 401a plan is designed to complement the 457 plan by providing a way for employer to match a percentage of employee contributions, an option not generally available with 457 plans.

401a Plan Contributions and Limits

While state laws vary, most 401a plans feature either mandatory or voluntary employee contributions. These contributions may be matched by the employer partially or fully. For employers with a pick-up provision in their retirement plan, contributions are made on a pre-tax basis; otherwise employer contributions are made after-tax. All employee contributions to a 401a plan are made on an after-tax basis. Employee contributions are subject to the 401a limits, defined as 25% of the employee’s salary. Some attractive 401a plans are directly funded by the employer and do not require employee contributions; employers may designate either a set percentage of the employee’s annual income or a specific dollar amount for these direct contributions.

401a Rollover

One major advantage of 401a plans is the ability to roll over the retirement savings if the participant changes employers.  401 withdrawals before retirement are subject to 20% mandatory withholding by the federal government; a qualified rollover plan avoids this penalty. Early withdrawal may attract an additional 10% withholding in addition to the 20% in certain special situations. In all cases, participants pay taxes only on funds received; investment earnings and principal funds for 401a accounts remain tax free until they are withdrawn.

401a Plan Participation

Depending on the plan, employees make either mandatory or voluntary contributions which are then invested. Employers pay into the plan, matching or supplementing the employee’s personal contributions. The 401a plan’s earnings are reinvested, providing additional income and supplementing the employer and employee contributions. Some plans are designed to offer considerable flexibility in investment options, putting control into the hands of the employee and allowing them to decide among various investment options. For participants with expert knowledge of investment options, this enhanced level of control can be a significant advantage.

For employers, the 401a plan offers an additional benefit for attracting and retaining employees; participants enjoy its flexibility and personal control. As a result, 401a plans continue to grow in popularity with employers and employees alike.