What is the definition of 401(A) Plan

A 401(A) Plan is simply a retirement account plan established by the employer. It uses a percentage-based or dollar contribution by the employee or employer or both parties for an employee's retirement plan. 401(A) Plan is directed at enriching employers of non-profit-making organizations. The plan has a special method of operations and rules.

The method of operations and strategies for running the plan is often decided by the sponsor, ie, the employer. The fund contributed in the account can be withdrawn by the employee through a rollover to a different standard retirement account, an annuity, and a lump sum payment.

The mechanism for funding a 401(a) plan is broken into three different options.

• The contribution to a retirement plan made by the employee himself or herself who is the benefactor.

• Retirement plan contributions from the employer on behalf of the employee.

• Contribution from both the employer and the employee.

Point To Note About 401(A) Plan

• The plan is used by employers to create incentive programs for the retention of employees

• The employer gets the primary benefits of the plan. The employer also has more control over the savings plan using the 401(k) plan.

• Among the control an employer can exercise over the plan include the decision on criteria for eligibility and vesting schedule.

• The employer also determines the limit of contributions that would be made.

• The employer also has the opportunity to establish different 401(a) plan each with its own eligibility criteria, vesting schedule and amounts for contribution.

The plan is established mainly for workers in public service vocations like educational institutions, government agencies, and non-profit organizations. As a result, only employers within these sectors are eligible for the establishment of the plan. The employers include teachers, government employees, support staff and administrators.

401(a) plan shares very similar features with the 401(k) plan.

Contributions For A 401(A)Plan

There are two basic methods of contributions for the plan

• Mandatory

• Voluntary

The contribution of the employer is mandatory. He or she determines whether contributions would be made either as a pretax or after-tax basis. However, an employee's contribution is optional.

The fund contributed by the employer is only on behalf of the employee. The contribution option used by the employer entails paying a fixed amount to the plan, or payment of a specific amount to match a fixed percentage of the employee contribution to the plan.

Investment Options for Plan

The decision over the choice of investment is determined by the employer. Usually, employers choose the safest and most secure investment option where risks are reduced to the barest minimum. These options involve the use of either the government bond or value-based stock fund.  

The employee has the power to transfer the money into an individual retirement account or a 401(k) plan.

Withdrawal And Vesting For 401(A) Plan

Becoming a vested member is based on the vesting schedule chosen by the employer. Most times, the employer link vesting to the number of years the employee works with the company. This method is used as an incentive for the employee's retention

The withdrawal of 401(a) plan is only made available in situations where the employee is 59.5 years, dies or is disabled or the plan is rolled over to any qualified retirement plan or IRS. Aside from these conditions, any other withdrawal would be subjected to the IRS 10% penalty for early withdrawal.