Difference Between 403(b) and 401(a)

The main difference between 403(b) and 401(a) is that 401(a) plans are generally set up by government entities or nonprofits and offer more employer control over contributions, while 403(b) plans are designed for certain public employees and nonprofit workers with more flexibility for employee contributions.

What is 403(b) and What is 401(a)?

A 403(b) plan is a retirement savings option available to employees of public schools, certain non-profits, and members of the clergy. These plans allow individuals to make pre-tax contributions, which can grow tax-deferred until withdrawal. Commonly, participants have access to a wide array of mutual funds and annuities as investment options.

On the other hand, a 401(a) plan is typically established by government employers, educational institutions, or non-profits. The plan usually includes mandatory contributions from the employer and may or may not include mandatory or voluntary contributions from the employee. The 401(a) plan can have more rigid guidelines set by the employer, including vesting schedules and contribution amounts.

Key Differences Between 403(b) and 401(a)

1. Employer Type: A 403(b) is typically offered to employees of public schools, non-profits, and religious organizations. A 401(a) plan is usually set up by government agencies or educational institutions.
2. Contribution Flexibility: In a 403(b) plan, contributions are mainly made by employees, often through salary deferrals. A 401(a) plan requires employer contributions and may mandate employee contributions as well.
3. Investment Options: 403(b) plans often provide access to mutual funds and annuities, while 401(a) plans may have different or additional investment choices determined by the employer.
4. Vesting Schedule: 401(a) plans frequently include a vesting schedule for the employer contributions, ranging from immediate vesting to a graduated vesting period. In contrast, 403(b) plans may not have such requirements.
5. Contribution Limits: The contribution limits for 403(b) plans are set by the IRS and allow for both employee and employer contributions. In 401(a) plans, the employer typically sets the contribution limits within IRS guidelines.
6. Plan Design: Employers have significant control over the design of a 401(a) plan, including contribution rates and eligibility requirements. A 403(b) plan generally offers more standardized design features.
7. Eligibility: Eligibility criteria for a 401(a) plan are decided by the employer and can vary widely. Eligibility for a 403(b) plan is usually broader and includes many employees in the educational and non-profit sectors.
8. Tax Treatment: Both plans offer tax-deferred growth, but the types of contributions and their treatments can differ. For example, 403(b) plans allow for Roth contributions, which are after-tax, whereas 401(a) plans typically do not.

Key Similarities Between 403(b) and 401(a)

1. Tax-Deferred Growth: Both 403(b) and 401(a) plans allow for contributions to grow tax-deferred until retirement.
2. Retirement Purpose: Both are designed to provide retirement income for participants.
3. Employer-Based: Both plans require an employer to establish and manage the retirement plan.
4. IRS Oversight: Both types of plans must comply with IRS regulations and guidelines regarding contributions, distributions, and reporting.
5. Portability: If leaving the employer, assets in both types of plans can often be rolled over into other qualified retirement accounts such as IRAs.
6. Penalty for Early Withdrawal: Withdrawals from either plan before age 59½ may incur a 10% early withdrawal penalty, subject to certain exceptions.
7. Required Minimum Distributions (RMDs): Both plans are subject to RMD rules, beginning at age 72 for participants.

Features: 403(b) vs. Features of 401(a)

1. Contribution Limits: Both 403(b) and 401(a) plans have set limits on the amount that can be contributed annually. The limits may vary based on IRS guidelines and the specific plan details.
2. Investment Choices: The options for investing contributions in a 403(b) plan usually include mutual funds and annuities. A 401(a) plan may offer different types of investments, controlled by the employer.
3. Employer Contributions: In a 401(a) plan, employer contributions are typically mandatory and defined by the employer. In a 403(b) plan, employer contributions are often optional and depend on the employer’s policies.
4. Employee Contributions: Employees can directly contribute pre-tax dollars to a 403(b) plan through salary deferrals. In a 401(a) plan, employee contributions might be optional and depend on the employer’s setup of the plan.
5. Vesting Schedule: A 401(a) plan often has a vesting schedule for employer contributions, meaning employees might need to work for a certain number of years before gaining full ownership of the funds. 403(b) plans may not have this requirement.
6. Plan Flexibility: Employers generally have more control over the design and rules of a 401(a) plan. A 403(b) plan is usually more standardized and regulated, with less employer control over specific features.
7. Tax Treatment: Contributions in both plans usually grow tax-deferred. However, the available types of contributions (pre-tax, post-tax, Roth) may differ between the plans.
8. Accessibility: Options for withdrawing funds or taking loans may differ between plans. For instance, 403(b) plans tend to offer loans and hardship withdrawals more readily than 401(a) plans.