When you get into the many different retirement plans available today and the complicated rules that govern each one, it is useful to find sources that put the information in clear terms, without the mumbo jumbo of legal terminology. Understanding the difference between 401K and 401A retirement funds is not very difficult, if you take it down to a basic explanation of each plan.
Both 401K and 401A are accounts opened by employers as an option for their employees to save money for retirement. With a 401K, employees contribute a certain percentage of their income into the account. The employer can choose to match those contributions, either partially or in full. Matching funds is a big incentive for employees to take part in the program because few people can pass up the opportunity of free money for retirement. Employees are further encouraged to participate in these accounts because it reduces the amount of taxable income they have at the end of the year. Their contributions are taken before taxes and will not be taxed until they start taking withdraws when they reach retirement age.
With a 401A, employees are not allowed to contribute into the account. The employer gets to decide exactly how much they want to put into the account, and there is not a requirement to open an account for every employee. Instead of functioning as a retirement plan to amass as much money as possible during the working years, a 401A is more of an incentive program, used to encourage workers to do their best job and stay with the employer long-term.
A 401A account generally works in the favor of the employer, but can benefit employees who work hard to earn their share of the incentives. The employer gets to set the rules of who qualifies, how much money goes into each individual account, and who is left out entirely. Different guidelines and programs can be set up for different groups of employees as well, such as one program for teachers and another for bus drivers within a school district.
Since workers do not have the option of putting their own money into these accounts, everything they receive is free money which could be released to them in cash, annuity payments, or as a rollover into another retirement account. Some employers will use both of these accounts together, by rolling incentives paid into the 401A into the employee’s 401K account.
The main difference between 401K and 401A retirement programs could not be more obvious. One is open to employee contributions and is used as a major source of income after the working-years have passed, while the other is more of an incentive program to encourage workers to stay on top of the game and remain with their current employer for as long as possible.