401a Retirement Plans

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What is a 401(a) Plan?

I have to admit that when I first saw the term, 401(a) plan, I was almost certain that it was a mistake. However, upon further research I discovered that it was not 401(k) with a typo, but a very useful, although more uncommon retirement plan. Here are all of the details on 401(a) plans that I discovered.

A 401(a) Money Purchase Plan is a retirement savings plan that allows you to set aside money for retirement. Your 401 Plan may allow contributions to be made by your employer, you, or both.

A 401a is a retirement plan that employers set up and that meet the qualification requirements of the Internal Revenue Code (IRC), Section 401a. Section 401a defines qualified trusts, including the various qualification rules. Section 401k further allows for employees to contribute to their plans, whereas under 401a plans, no employee contributions are allowed.

Each state has specific laws governing 401a plans. Under a 401a plan, the employer determines the amount of money to be contributed each year, vesting schedules and eligibility requirements that may be tied to job performance as a way to retain key employees.

Under 401a, employers are allowed to create different 401a plans for different groups of employees, giving the employer flexibility in creating different incentive programs for specific employee categories. Funds from 401a plans may be distributed through lump-sum payments, rollovers, or annuity payments.
Your contributions may be made on either a mandatory or a voluntary basis. The employer decides on the method of participant contribution, as well as whether participant contributions will be made on a pre-tax (picked-up contributions) or an after-tax basis.

The most common method our clients use is direct employer contributions with mandatory participant contributions with the “pick-up provision.” Under this scenario; mandatory employee contributions are made on a pre-tax basis. Your plan may also allow you to make voluntary contributions on an after-tax basis. These voluntary after-tax contributions are limited to 25 percent of your compensation.

Employer contributions to your 401a plan may be made under one of the following methods:

1. The employer may contribute a fixed dollar or percentage amount, either with or without a required employee contribution.
2. The employer may match a fixed percentage of employee contributions.
3. The employer may match the participant contribution within a given range (i.e. a variable employee match).

What are the Benefits of participating in a 401a plan?