What Are 401(a) and 403(b) Retirement Plans?

Employer-sponsored retirement plans offer structured avenues for long-term savings, helping individuals build financial security throughout their careers. These plans provide a mechanism to accumulate wealth, fostering a stable financial outlook in retirement.

Understanding 401(a) Plans

A 401(a) plan is an employer-sponsored retirement account established under Internal Revenue Code Section 401(a). These plans are offered by governmental entities, educational institutions, and some non-profit organizations. They help employees save for retirement, often with an emphasis on employer contributions.

Eligibility for a 401(a) plan is determined by the employer, based on criteria like job position or length of service. Common participants include government employees, teachers, and administrators. Some plans make participation mandatory for eligible employees, with contributions automatically deducted from paychecks.

Contributions to a 401(a) plan can come from both the employer and employee. Employer contributions are often non-elective or matching. The IRS sets annual limits on total contributions (employer and employee combined), which for 2024 is $69,000.

Vesting schedules determine when an employee gains full ownership of employer contributions. Employee contributions and their earnings are immediately 100% vested, but employer contributions may have a graded schedule, requiring several years of service to become fully vested. Investment options are chosen by the employer and commonly include mutual funds, stocks, and bonds. These plans feature a range of options from conservative stable-value funds to more aggressive stock and bond funds.

Distributions from a 401(a) plan are permitted upon reaching age 59½, separation from service, death, disability, or hardship. Participants are subject to Required Minimum Distributions (RMDs), which mandate withdrawals starting at age 73.

Understanding 403(b) Plans

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, serves as a retirement savings vehicle for employees of public schools, certain 501(c)(3) tax-exempt organizations, and some ministers. These plans enable employees to save for retirement through payroll deductions.

Eligibility for a 403(b) plan extends to employees like teachers, school administrators, hospital employees, and charity workers. Most 403(b) plans operate under a “universal availability rule,” meaning if one employee can make elective deferrals, the offer must be extended to all employees. Certain exclusions may apply, such as for employees working less than 20 hours per week.

Contributions to a 403(b) plan primarily involve employee elective deferrals made through salary reduction agreements. Employers may also contribute, often through matching or discretionary amounts. For 2025, the employee elective deferral limit is $23,500. Participants age 50 or over can make additional catch-up contributions, which for 2025 is $7,500. Some plans permit a “15-year rule” catch-up contribution for long-term employees, allowing an additional $3,000 per year, up to a lifetime maximum of $15,000, for those with 15 or more years of service.

Investment options in a 403(b) plan are limited to annuities and mutual funds chosen by the employer. Annuities can provide a steady income stream, while mutual funds offer diversified portfolios. Some plans may also offer target-date funds, which adjust asset allocation as the participant approaches retirement.

Withdrawal rules for 403(b) plans are similar to other retirement accounts. Funds can be withdrawn without penalty starting at age 59½. Participants are subject to Required Minimum Distributions (RMDs) once they reach age 73.

Key Distinctions and Commonalities

Both 401(a) and 403(b) plans serve as employer-sponsored retirement savings vehicles. Their primary distinction lies in the types of organizations that offer them. 401(a) plans are available to employees of governmental entities and some non-profit organizations. In contrast, 403(b) plans are designed for employees of public schools, 501(c)(3) tax-exempt organizations, and certain ministers.

The regulatory framework also differs. 401(a) plans are subject to the Employee Retirement Income Security Act (ERISA) if offered by private employers. 403(b) plans offered by public schools and governmental entities are exempt from ERISA, while those from 501(c)(3) organizations may or may not be. This can impact fiduciary oversight and consumer protections.

Both plan types offer employer-selected investment choices, commonly including mutual funds and annuities. 403(b) plans historically have had a greater prevalence of annuities. 401(a) plans may offer a broader range of investment options, including individual stocks and bonds.

Contribution flexibilities also differ. Both plans allow for employee and employer contributions subject to IRS limits. 403(b) plans offer unique catch-up contribution provisions, including an additional catch-up for employees with 15 or more years of service with the same employer, a feature not found in 401(a) plans.

Despite these distinctions, 401(a) and 403(b) plans share commonalities. Both permit pre-tax contributions, allowing for tax-deferred growth of investments until retirement. They impose a 10% penalty for early withdrawals before age 59½, and require minimum distributions once the participant reaches age 73. Both plan types help employees accumulate retirement savings, providing financial security.