What Is the Difference Between a 401a and 403b Plan?

Retirement plans such as the 401(a) and 403(b) offer tax advantages for employees in the public and non-profit sectors. While both are employer-sponsored accounts designed to help employees save for retirement, they have distinct differences in their structure, contribution rules, and eligibility.

The 401(a) Plan Explained

A 401(a) plan is a retirement savings vehicle offered by governmental bodies, educational institutions, and certain non-profit organizations. Employers have considerable control over the plan’s design, establishing specific eligibility requirements and contribution structures.

Participation in a 401(a) can be a condition of employment, and employers can mandate enrollment. Contribution arrangements are defined by the plan document. Plans may be funded entirely by the employer, require mandatory employee contributions, offer matching funds, or use a combination of these methods.

Investment options are diverse, including mutual funds, stocks, and bonds, similar to a 401(k). The offerings are determined by the employer and plan administrator. For 2025, the total combined contribution limit for the employee and employer is the lesser of 100% of compensation or $70,000.

Employer contributions are subject to a vesting schedule, which determines when an employee has full ownership of those funds. While an employee is always 100% vested in their own contributions, employer funds may require a period of service before becoming the employee’s property.

The 403(b) Plan Explained

The 403(b) plan is a retirement savings plan for employees of public schools, colleges, universities, and certain 501(c)(3) tax-exempt organizations like charities and hospitals. These plans are sometimes called tax-sheltered annuity (TSA) plans.

Funding for 403(b) plans comes from employee pre-tax salary deferrals, which reduces current taxable income. For 2025, employees can contribute up to $23,500. Employer contributions are permitted but are less common, and employee participation is voluntary.

Historically, 403(b) investment options were limited to annuity contracts. Regulations were updated in 1974 to also allow investments in mutual funds. Today, most 403(b) plans offer a range of both annuity products and mutual funds.

A feature of the 403(b) plan is a catch-up contribution for long-tenured employees. Participants with 15 or more years of service with their current employer can contribute an additional amount up to $3,000 per year, subject to a lifetime maximum of $15,000. This provision helps those who may have had limited opportunities to save earlier in their careers.

Key Distinctions Between Plan Types

The primary differences between 401(a) and 403(b) plans involve the employers who can offer them, how they are funded, and specific contribution rules.

• Eligible Employers: A 401(a) is available to a broad range of governmental and non-profit employers, while a 403(b) is restricted to public educational institutions and 501(c)(3) organizations.
• Contribution Structure: Participation in a 401(a) can be mandatory and may be funded entirely by the employer. In contrast, 403(b) participation is voluntary and funded primarily by employee salary deferrals.
• Investment History: While 401(a) plans have long offered a broad array of investment choices similar to 401(k)s, 403(b) plans were traditionally restricted to annuity contracts. Although 403(b)s now commonly include mutual funds, this history can still influence a plan’s investment lineup.
• ERISA Applicability: The Employee Retirement Income Security Act of 1974 (ERISA) provides federal protections for retirement plans. Governmental 401(a) plans are exempt from ERISA, while many 403(b) plans and non-profit 401(a)s are subject to its rules.
• Catch-Up Contributions: A standard catch-up contribution for participants age 50 and over is available in 403(b) plans, allowing an additional $7,500 in contributions for 2025. Effective in 2025, some 403(b) plans may also permit participants aged 60 to 63 to make larger catch-up contributions of up to $11,250. These age-based catch-up options are not available in 401(a) plans.

Rollover and Withdrawal Considerations

When an employee leaves their job, they have the option to roll over funds from their 401(a) or 403(b) account. Common destinations include an Individual Retirement Account (IRA) or another employer’s retirement plan, such as a 401(k). A direct rollover, where funds are transferred from one financial institution to another, is recommended to avoid mandatory tax withholding and potential penalties.

Rules for taking distributions are similar for both plans. Participants can access funds without penalty upon reaching age 59½, separating from service at age 55 or later, or in cases of permanent disability or death. Withdrawals before age 59½ for other reasons are considered early distributions and are subject to a 10% federal penalty tax in addition to regular income tax.

Both plans are subject to Required Minimum Distribution (RMD) rules. These IRS regulations mandate that individuals must begin taking withdrawals after reaching a certain age. The current age to begin RMDs is 73, but this is scheduled to increase to 75 in the future. The purpose of RMDs is to ensure that tax-deferred retirement accounts are not used to avoid taxes indefinitely.