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

Employer-sponsored retirement plans are a key component of long-term financial planning, helping individuals save and invest for their future with advantageous tax treatments. These plans offer benefits like tax deferrals on contributions and earnings, allowing savings to grow. Employer contributions, such as matching funds, further enhance their value.

Understanding 401(a) Plans

A 401(a) plan is an employer-sponsored retirement plan typically offered by governmental entities, educational institutions, and some non-profit organizations. These plans are generally structured as defined contribution plans, where the retirement benefit depends on the amount contributed and the investment performance. Employers often play a significant role in funding these plans, with contributions sometimes being mandatory.

Contributions to a 401(a) plan can originate from both the employer and, in some cases, the employee. Employer contributions are frequently non-elective, meaning they are made regardless of employee contributions, or they may involve matching a portion of employee contributions. Employee contributions, if permitted, might be mandatory and are generally made on a pre-tax basis, though after-tax contributions can also be allowed.

The Internal Revenue Service (IRS) sets annual limits on the total contributions to 401(a) plans, encompassing both employer and employee contributions. For 2025, the combined total contribution limit for a 401(a) plan is $70,000, or 100% of the employee’s compensation, whichever is less. This limit is subject to annual cost-of-living adjustments.

Employer contributions made to a 401(a) plan are often subject to a vesting schedule, which dictates the employee’s ownership percentage of these funds over time. Common vesting schedules include graded vesting, where ownership gradually increases, or cliff vesting, where full ownership is granted after a specific period of service. Employee contributions and their associated earnings, however, are typically immediately 100% vested.

Investment options within 401(a) plans are generally determined by the employer and tend to be a more limited selection. These options often include mutual funds or collective trusts. While the employer controls the available choices, participants usually have some control over how their contributions are allocated.

Withdrawals from a 401(a) plan are typically allowed upon reaching age 59½, separation from service, disability, or death. Distributions before age 59½ are generally subject to ordinary income tax and a 10% early withdrawal penalty, unless an IRS exception applies. The funds can often be rolled over into another qualified retirement plan or an Individual Retirement Account (IRA) upon leaving employment.

Understanding 403(b) Plans

A 403(b) plan is a retirement savings plan for employees of public schools, certain 501(c)(3) tax-exempt organizations, and some ministers. Also known as tax-sheltered annuity (TSA) plans, they function similarly to 401(k)s for the non-profit and educational sectors.

Contributions to a 403(b) plan can come from both employee salary deferrals and employer contributions. Employees can choose to make pre-tax contributions, reducing their current taxable income, or designated Roth contributions, which are made with after-tax dollars but allow for tax-free qualified distributions in retirement. Employer contributions, which may include matching or non-elective contributions, are also permitted.

The IRS sets annual contribution limits for 403(b) plans, which apply to both employee and combined employer contributions. For 2025, employees can defer up to $23,500 from their salary. The total combined employee and employer contribution limit for 2025 is $70,000.

403(b) plans offer specific catch-up contribution rules for eligible participants. Employees aged 50 or older can contribute an additional $7,500 in 2025, bringing their personal deferral limit to $31,000. Additionally, some long-serving employees with at least 15 years of service with the same eligible employer may qualify for an extra $3,000 annual catch-up contribution, up to a lifetime maximum of $15,000.

Investment options within 403(b) plans are selected by the employer and commonly include annuity contracts and mutual funds. Annuities provide a guaranteed income stream, while mutual funds offer diversified investment in stocks, bonds, or both.

Funds can typically be accessed penalty-free at age 59½, upon separation from service, or in cases of disability or death. Hardship withdrawals may also be permitted for immediate and heavy financial needs. These are subject to strict IRS criteria and can include expenses like medical bills or costs for a principal residence.

Key Distinctions

The fundamental differences between 401(a) and 403(b) plans primarily revolve around the types of organizations that can offer them and the nature of contributions. Unlike 401(a) plans, which are broadly available to governmental entities, educational institutions, and some non-profits, 403(b) plans are specifically for public schools, 501(c)(3) tax-exempt organizations, and certain religious organizations.

Regarding primary funding, 401(a) plans are largely employer-driven, with employer contributions often being mandatory and forming the core of the savings. Conversely, 403(b) plans place a significant emphasis on voluntary employee salary deferrals, although employer contributions are also common. While 401(a) plans may not always allow for employee contributions, 403(b) plans are built around them.

Investment vehicles also present a notable distinction between the two plan types. 403(b) plans frequently feature annuity contracts alongside mutual funds as investment options, often emphasizing a blend of guaranteed income and market-based growth. In contrast, 401(a) plans typically offer a more traditional selection of mutual funds and collective trusts, with annuities being less common.

A significant difference lies in the availability of specific catch-up contributions. While 401(a) plans generally do not offer additional catch-up provisions, 403(b) plans provide special opportunities for older or long-serving employees. These include an age-based catch-up for those 50 and over and a unique 15-year rule catch-up for employees with extended service at the same eligible employer.

The structure of employee participation also varies. 401(a) plans can often mandate employee enrollment, with contribution models frequently set by the employer. Conversely, participation in a 403(b) plan is typically voluntary, allowing employees to decide whether and how much to contribute, up to the IRS limits.

While both plans offer tax advantages, the emphasis on tax treatment for employee contributions differs. 403(b) plans explicitly allow for both pre-tax and Roth (after-tax) employee deferrals. Though 401(a) contributions can be pre-tax, the Roth option for employee deferrals is more common in 403(b) plans. Both grow tax-deferred until withdrawal.

Loan and hardship withdrawal rules can have differences. Both plan types may permit hardship withdrawals under certain conditions. Some 403(b) plans may permit hardship withdrawals from employer contributions if invested in an annuity contract.