Most people working at private companies have a 401(k) plan, and that’s it. Those who work at educational institutions or non-profits often have a 403(b) plan, which works more or less the same as a 401(k) plan. Some state or local government or tax-exempt organizations also have a 457 plan, which is completely separate, with a separate contribution limit. In 2020, an employee can contribute $19,500 to the 403(b) plan and another $19,500 to the 457 plan. To top it off, some employers also offer a 401(a) plan. A lucky employee working at a hospital can have a 401(a), a 403(b), and a 457 plan all at the same time!
The 401(a) plan can have several different flavors:
(A) The employer simply contributes a percentage of your pay. The employee doesn’t have to do anything. The employee will pay tax on the withdrawals after retirement.
(B) The employee is required to contribute a set percentage of pay pre-tax, with no exception. This can be seen as a variation of (A). Instead of the salary stated on your offer letter, your salary is permanently lowered, and the employer will contribute the remainder into the 401(a) plan.
(C) The employee is asked to contribute a percentage of pay pre-tax, but the decision is one-time and irrevocable. If you choose not to participate, you just miss the boat forever. If you do choose to participate, whatever percentage you choose will stick permanently; no changes are allowed. You have this choice usually only when you first become eligible.
This again becomes a variation of (B), which traces back to (A). Instead of a set percentage, you can choose your own percentage. However, once the percentage is chosen, it again can be seen as permanently lowering your salary and having the employer contribute the remainder to the 401(a) plan.
In all three variations above, even though the money goes into the plan pre-tax, it does not count against the 401(k)/403(b) contribution limit ($19,500 in 2020), because the contribution isn’t elective. The law gives an exception to a one-time irrevocable decision from being counted as elective. This makes it not subject to the limit on elective deferrals across all plans.
(D) This variation is seen less often but some employers offer it. Instead of contributing pre-tax money, you can contribute after-tax money. You are not limited to a one-time irrevocable choice. You can start, stop, increase, or decrease your contribution percentage as you do in a normal 401(k)/403(b) plan. At the time of withdrawal, the contributions are not taxed again but the earnings are taxable. It’s just like a 401(k) or 403(b) plan that accepts non-Roth after-tax contributions. You do a mega backdoor Roth with it.
Because the contributions in the (D) setup are non-Roth after-tax, they also don’t count against the 401(k)/403(b) contribution limit ($19,500 in 2020).
Regardless which flavor of 401(a) you have or any combination of flavors, the contributions do count toward the annual addition limit ($57,000 in 2020). A quirk gives the 403(b) a separate $57,000 limit. If all stars are aligned, you can have $57,000 to the 403(b), $57,000 to the 401(a), and $19,500 to the 457, for a total contribution of $133,500, before any catch-up contributions! Of course most people worry about earning $133,500 before they worry about contributing $133,500 to their retirement plans.
What should you do if you have a 401(a) plan? If it’s flavor (A) or (B), the decision is made for you. There’s nothing you can do. If it’s flavor (C), choose the maximum you are allowed, because you can’t increase it later. If you have flavor (D), first max out 401(k)/403(b) and 457, and then choose the maximum and do a mega backdoor Roth.
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