What Is the Difference Between a 401(a) and 403(b)?

Retirement plans in the United States are financial arrangements designed to help individuals accumulate funds for their post-employment years. These plans often receive favorable tax treatment to encourage long-term savings. They can be established by various entities, including employers, to provide a structured way for workers to build retirement security.

Among the diverse landscape of employer-sponsored retirement savings options, two common types are the 401(a) and 403(b) plans. Both are tax-advantaged accounts that allow contributions to grow over time, with taxes typically deferred until retirement. While sharing the overarching goal of retirement savings, these plans are distinct in their design, the organizations that offer them, and the employees they serve.

Organizations and Participants

The types of organizations eligible to sponsor a 401(a) plan differ from those offering a 403(b) plan, which in turn defines the typical participants for each. A 401(a) plan is an employer-sponsored money-purchase retirement plan often established by governmental entities, educational institutions, and certain non-profit organizations. Employees of state and local governments, public schools, and various non-profit organizations may find themselves enrolled in a 401(a) plan.

A 403(b) plan, also known as a Tax-Sheltered Annuity (TSA) plan, is specifically designed for employees of public schools, charitable 501(c)(3) tax-exempt organizations, and certain faith-based organizations. This includes a broad range of professionals such as teachers, school administrators, hospital staff, university professors, and employees of various non-profit groups. The distinction in employer types is a primary factor differentiating these two retirement savings vehicles.

A key difference in participation can be that a 401(a) plan allows employers to make participation mandatory for eligible employees, which is not typically the case for 403(b) plans where participation remains voluntary for employees. This can influence how many employees are covered under each plan type. Both plans aim to provide a structured savings mechanism, though the sponsoring entity dictates the specific eligibility and enrollment terms.

Contributions and Vesting

Contributions to both 401(a) and 403(b) plans can come from employees, employers, or both, and are generally made on a pre-tax basis, allowing for tax-deferred growth. For 403(b) plans, employees can make elective deferrals through payroll deductions, similar to a 401(k) plan. Employers may also contribute to 403(b) plans through matching contributions or non-elective contributions, which are not tied to employee deferrals.

The Internal Revenue Service (IRS) sets annual contribution limits that apply to both plan types, though the specific calculations can differ. As of 2025, the elective deferral limit for employees participating in 403(b) plans is $23,500. The total annual contributions from both employee and employer to a 403(b) plan generally cannot exceed $69,000 for 2024, a figure that is subject to cost-of-living adjustments annually. For 401(a) plans, the total defined contribution limit, including both employee and employer contributions, is also subject to IRS limits, which are adjusted annually for inflation.

Both plan types offer catch-up contribution provisions for older workers. Employees aged 50 and over can make additional elective deferrals to their 403(b) accounts beyond the standard limit. Furthermore, some 403(b) plans may allow for an additional catch-up contribution based on years of service with the employer, which can provide a significant boost to savings for long-tenured employees. While 401(a) plans also have catch-up provisions, their specific application can vary depending on the plan’s design.

Vesting refers to the employee’s ownership of employer contributions made to their retirement account. In both 401(a) and 403(b) plans, employer contributions typically follow a vesting schedule, meaning an employee must work for a certain period to gain full ownership of those funds. Common vesting schedules include cliff vesting, where an employee becomes 100% vested after a specific number of years, or graded vesting, where ownership gradually increases over several years. The specific vesting schedule is determined by the employer and outlined in the plan document.

Investment Options and Distributions

The investment options available within 401(a) and 403(b) plans can vary, reflecting their distinct structures. 403(b) plans traditionally offered investment choices primarily through annuities, which are contracts with an insurance company, and mutual funds. This structure can sometimes lead to a more limited selection of investment products compared to other retirement plans.

In contrast, 401(a) plans, which can be structured as money purchase, profit-sharing, or stock bonus plans, typically offer a broader range of investment vehicles. These often include various mutual funds, allowing participants more diversification options. The specific investment choices within either plan type are determined by the plan sponsor, and participants typically select from a curated list of options.

Distributions from both 401(a) and 403(b) plans are generally subject to similar rules regarding age and penalties. Withdrawals made before age 59½ are typically subject to a 10% early withdrawal penalty, in addition to being taxed as ordinary income. However, exceptions to this penalty exist for certain events, such as disability, death, or separation from service in some cases. Both plan types also have Required Minimum Distribution (RMD) rules, which mandate that participants begin taking withdrawals from their accounts once they reach a specific age, currently 73 if born after 1949.

Both 401(a) and 403(b) plans may permit participants to take loans against their account balance or make hardship withdrawals under specific circumstances. Plan loans typically require repayment with interest, and hardship withdrawals are generally subject to taxation and, if applicable, the early withdrawal penalty. When an employee leaves their employer, funds from both 401(a) and 403(b) plans can typically be rolled over into another qualified retirement plan, such as a 401(k) or an Individual Retirement Account (IRA), to maintain their tax-deferred status. This portability allows individuals to consolidate their retirement savings as they change employers throughout their career.