How Is a 401(A) Different From a 401(K)?

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Use your 401k or 401a to lower your taxes.
Use your 401k or 401a to lower your taxes. (Image: Creatas/Creatas/Getty Images)

Saving for retirement has never been more critical, and both public and private employers have programs in place to make it easier for workers to set money aside for the future. If you work for a private employer, you might have access to a 401k plan, but if you work for a school or other public agency you might be offered a 401a plan instead. These two plans are similar in some ways, but there are some key differences of which to be aware.

Funding

With a 401k plan, the majority of the funding is done by the employee, with the employer often putting in a small amount in the form of an employer match. For example, a worker might contribute 10 or 15 percent of pay to the 401k plan, and the employer might put in another 3 percent in matching funds. The typical 401a plan is just the opposite, with the employer contributing the bulk of the funding and the employee putting in the rest. The typical employee contributions to both a 401k and 401a plan are made on a pre-tax basis, although 401a participants may have the ability to put in extra money after-tax.

Contribution Limits

As of 2011, the contribution limit for a 401k plan is $16,500. The contribution limit for a 401a plan is much higher, at $49,000. The IRS reviews the limits on both plans on an annual basis and makes a determination about raising the limits at that time. When you invest in either a 401a or a 401k plan, the employer keeps track of the contributions and automatically stops them when you reach the annual limit.

Type of Employer

One significant difference between a 401k and a 401a plan is the type of employer offering the plan. The 401k plan is offered by a private for-profit company, such as a corporation. On the other hand, 401a plans are offered by public institutions such as schools. If you work for a school, you might have access to a 401a plan, but if you work in private industry you would have to choose a 401k plan instead.

Mandatory Participation

Employers who offer 401a plans can require that their employees participate in the plan. This mandatory participation is not part of the 401k plan. Although companies can strongly encourage their workers to contribute to a 401k through automatic enrollment, financial education and other means, they cannot require that those workers participate in the plan.

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