A reader sent me an e-mail some time ago about the interplay between a 401(a) plan and a Roth solo 401(k) plan. You probably heard of 401(k), 403(b), and 457 plans. The names of these plans come from the section numbers in the tax code which specify the rules for these plans.
401(k) plans are offered primarily by private sector employers. Employees in public schools and tax-exempt organizations have 403(b) plans. State and local governments and tax-exempt organizations have 457 plans. Some employers offer both a 403(b) plan and a 457 plan. What is a 401(a) plan then?
Strictly speaking a 401(a) plan is a bit of a misnomer because other kinds of plans including 401(k) plans must also qualify under tax code 401(a). In a loose context, a 401(a) plan is a retirement savings plan in which employees can’t choose or change the amount contributed to the plan. It’s also called a “money purchase plan.”
In a 401(k) plan, employees make so-called “elective deferrals” which means that employees have a choice between (a) contribute to the plan and defer income tax on the contributions; and (b) receive the money in cash and pay the tax. In a 401(a) money purchase plan, either the employer contributes to the plan all by itself OR the employer makes it mandatory for all covered employees and deducts a set percentage from everybody’s paycheck.
As a result, contributions to a 401(a) plan do not count toward the 401(k) “elective deferrals” limit ($16,500 in 2009). If someone has a both 401(a) plan and a 401(k) plan, he or she can still contribute up to $16,500 in 2009 to the 401(k) plan. Contributions to a 403(b) plan or a SIMPLE IRA also count toward the same 401(k) elective deferral limit, but contributions to a 457 plan do not (go figure).
I don’t work in the employee benefits field any more. It still amazes me how many different types of retirement plans we have in the tax code and how they have similar but different rules. We’ve got this alphanumeric soup:
- 401(a) money purchase plan
- 401(k) plan (with Traditional and Roth accounts)
- 403(b) plan (with Traditional and Roth accounts)
- 457 plan (no Roth yet, why?)
- SEP (no employee contributions allowed, why?)
- SIMPLE 401(k) (lower contribution limit than regular 401k, why?)
- SIMPLE IRA (no Roth, why?)
Why can’t we just have one type of plan regardless where you work? The more you look at anything related to the tax code, the more you see it’s a total mess.