401(a) Vs 403(b) – Similarities And Differences

401(a) and 403(b) are favourable tax-advantaged retirement saving options. Both are employer-sponsored and share various similarities as pre-tax retirement accounts. However, there are key differences between contribution rules and eligibility requirements.

You can save tax-deferred money with 401(a) and 403(b) until retirement. Despite their similarities, these plans differ in crucial areas, such as eligibility criteria, annual contribution limits, employer’s involvement, and contribution toward employees’ saving plans.

Major Differences – 401(a) Vs 403(b)

A 401a is designed for employees of state or local governments. Employees of some qualified not-for-profit non-government organizations can also get benefits from 401a. This plan allows rollover to other plans (offered by the new employer) in case of a job shift. Like 403(b), it can cost you a 10% withdrawal penalty before age 59.5.

On the other hand, a 403(b) is also a retirement savings account and works under the IRS guidelines. It is usually offered to employees of non-profit and tax-exempt organizations (IRS Section 501(c)(3) qualified), including schools, charities, churches, and religious institutions. Both fall under non profit retirement plans and are available upon eligibility.

Which Plan Can You Access

There is a general rule of thumb. If your employer is a non-profit organization not directly affiliated with the government, you’re more likely to have access to a 403(b) plan.

Although some nonprofit organizations are qualified to offer 401(a) to their employees, 401(a) is majorly offered to state and local government servants. We will discuss which nonprofit entities can opt for both 403(b) and 401(a), in dual eligibility later.

On the other hand, 403(b) is only for employees of non-profit entities. This includes teachers, administrators, doctors, nurses, and other employees. The organizations can be hospitals, religious institutes, charities, or educational centers.

Which Employees Get To Choose Between 403(B) And 401(A)

Many public schools, universities, and government agencies can qualify as nonprofit organizations and government entities. This dual status makes them eligible to offer their employees, both 403(b) and 401(a) plans. It is called dual eligibility.

Dual eligibility provides employees with the opportunity to contribute to both plans. This increases their retirement savings compared to participating in only one plan.

Annual Contribution Limits & Employer Match – 401(a) Vs 403(b)

Employee contribution in 403(b) is necessary, while in 401(a), it is not. This makes the basic contribution limit for 403(b) and 401(a) different. Both have the same annual limit of $67,000 when comparing the sum of contribution and employer’s match.

As per IRS guidelines, employees with 403(b) have maximum contribution of $23000. Moreover, if you are 50 or above, you can save more by contributing a catch-up amount to 403(b). The catch-up amount is limited to $7500 annually (total $30,500 for 5 years) in 2024. 

It is important to remember that this catch-up amount can change. It is essential to regularly check IRS guidelines and any revisions in contribution limit rules.

As 401(a) is an employer-driven saving plan, Employers must contribute to employee’s 401(a). Most importantly, an employee’s contribution is based on an agreement with his/her boss. It is usually a percentage of the salary.  

However, unlike 403(b) plans, there is typically no catch-up or additional contribution in 401(a).

Is Employer’s Contribution Necessary? 403(b) Vs 401(a)

For 403(b) plans, it is voluntary or optional. It means employers are not required to contribute. However, many employers offer matching contributions, similar to how they might for a 401(k) plan, to encourage employee participation. Whether or not an employer contributes to 403(b) depends on the specific employer’s policy.

401(a) plans always include employer contributions. The contribution is typically determined by the employer. It can be a fixed percentage of the employee’s salary or a fixed dollar amount. The employer dictates the contribution rules and specifications.

Vesting Differences – 401(a) And 403(b)

Vesting is the complete ownership of the employer’s contributed funds. Generally, 403(b) plans have more favorable vesting rules than 401(a) plans. Employee and employer contributions to a 403(b) plan are typically immediately vested. Simply put, with 403(b), you own 100% of your contributions from day one.  

But, employer contributions to a 401(a) often follow a vesting schedule, similar to 401(k) plans. This means you may not immediately own all of your employer’s contributions.

Vesting schedules for 401(a) plans can be either:

Cliff Vesting: Under a cliff vesting schedule, employees do not own any portion of their employer’s contributions until they reach a specific point in time (the “cliff”). Once they reach that point, the employer’s contributed funds become 100% vested immediately.

Gradual (or Graded) Vesting: A gradual or graded vesting schedule allows employees to earn a percentage of their employer’s contributions over time. Instead of waiting for a specific cliff date, employees accumulate ownership (or vesting) in increments.

While these general rules apply to many 403(b) and 401(a) plans, there can be exceptions. Employers have flexibility in designing retirement plans. So, always review your employer’s specific vesting schedules.  Some employers may offer immediate vesting, while others may require a certain number of years of service before you fully own the employer contributed funds.

Tax Treatment On Contributions

In 403(b), your contributions are tax-deferred. Pre-tax and Roth; both options are available, allowing for pre-tax and after-tax contributions. On the other hand, 401(a) has only a pre-tax contribution option. There is no Roth 401(a) yet. It may become available by the IRS in the future. Hence, in 401(a), the taxes are deducted on distributions only.

Investment Options In 403(b) And 401(a)

The most significant difference in investment options between 403(b) and 401(a) plans lies in the prevalence of annuities.

Due to their tax-deferred growth and potential income guarantees, annuities have been a staple investment option in 403(b) plans. However, they are less common in 401(a). 401(a) typically offers a more comprehensive range of investment options, such as mutual funds, index funds, and sometimes even company stock.

Frequently Asked Questions