401(a) vs. 403(b) retirement plans: What is the difference?

If you’re thinking of offering a retirement plan, you’ll likely find yourself comparing 401(a) and 403(b) plans. Both of these retirement plans have their pros and cons, which you have to properly weigh to determine which one better suits your needs and goals.

The guide below can help you understand the key differences between 401(a) and 403(b).

Differences between a 401(a) plan and a 403(b) plan

401(a) plans are used by public-sector or non-profit employers for specific employee groups, such as educators or healthcare workers. These plans offer employers substantial discretion in setting rules for eligibility and contributions, subject to nondiscrimination requirements under Internal Revenue Code (IRC) § 401(a)(4). 

403(b) plans can provide more flexibility for employees by offering features like various catch-up contribution options for older workers. While both plan types can be amended to permit Roth contributions, this feature is more commonly found in 403(b) plans.

What is a 401(a) plan?

A 401(a) plan refers to an employer-sponsored retirement plan similar to a 401(k) plan. The primary difference is that 401(a) plan sponsors are typically government agencies, nonprofit organizations, and educational institutions, while 401(k) sponsors are generally private-sector companies.

401(a) plans also allow employers significant control over the plan’s rules. For example, employers can set the eligibility requirements and make participation mandatory for qualified employees. 

Employers are required to contribute to their employees’ 401(a) plans. The plan may also be structured to allow for employee contributions, where the employer can set a fixed percentage or permit employees to change their contribution rate at specific times. Depending on the plan's design, some employees, particularly in government, might have the option to make contributions to their 401(a) accounts or a traditional pension plan.

Tax advantages of a 401(a) plan

Employees

When you participate in a 401(a) plan, your contributions are typically made with pretax dollars, meaning they are deducted from your salary before taxes are taken out. Different employers may offer different investment options, but you’ll typically be able to invest in a variety of professionally managed mutual funds that provide exposure to areas of the market such as equities (stocks) and fixed income (bonds). 

Unlike a standard brokerage account, you will not owe taxes each year on interest, capital gains, or dividends. Taxes are paid at your regular income tax rate upon qualified withdrawals, which is typically at age 59½. Early withdrawals may incur a 10% penalty in addition to income tax.

Employers

A 401(a) plan offers significant tax advantages for employers. Employer contributions are tax-deductible, which reduces the organization’s taxable income, and are exempt from payroll taxes such as Social Security and Medicare. For example, a $100,000 contribution to a 401(a) plan could result in a payroll tax savings of $7,650, based on a 7.65% tax rate.

401(a) contribution limits

For 2025, the total contribution limit for 401(a) plans is $70,000, which includes the combined total of employee and employer contributions. However, contributions cannot exceed 100% of the employee's total salary. For example, if the employee earns $45,000 a year, the total employee and employer combined contribution for that year cannot exceed $45,000.  

While many 401(a) plans are funded solely by employers, a plan that permits employee contributions can also allow for age 50 catch-up contributions under IRC § 414(v).

What is a 403(b) plan?

A 403(b) plan refers to a tax-favored retirement plan that’s intended for employees of 501(c)(3) organizations and public schools. Some examples of organizations that typically offer 403(b) plans include:

• Public schools

• 501(c)(3) tax-exempt organizations

• Cooperative hospital organizations

• Religious institutions

Sponsors of 403(b) plans establish eligibility requirements and must use one of the following investment vehicles as required by the IRS:

• Custodial accounts that invest in mutual funds

• Annuity contracts with insurance companies

• Retirement income accounts for religious organization employees that invest in annuities or mutual funds

A key difference is that 403(b) plans can offer both annuity and mutual fund options, while 401(a) plans typically focus on mutual fund investments.

Additional reading: Comparing a 403(b) vs. a 401(k)

Tax advantages of a 403(b) plan

Employee

The tax treatment for a 403(b) plan is similar to that of a 401(a) plan. Employee contributions are made on a pre-tax basis, and the funds grow tax-deferred. Regular income tax is due on qualified withdrawals, which can begin at age 59½.

Employer

Employers also receive tax benefits. Contributions made by the employer are tax-deductible, which can lower the organization's taxable income. Additionally, these contributions are not subject to payroll taxes such as Social Security and Medicare.

403(b) contribution limits

Under IRC rules, employees can contribute up to $23,500 in elective deferrals to their 403(b)accounts in 2025. Several catch-up provisions are also available:

• Age 50 catch-up: Employees aged 50 and over can contribute an additional $7,500.

• New in 2025: As part of the SECURE 2.0 Act, individuals aged 60 to 63 have a higher catch-up limit of $11,250.

• 15-year rule: Some 403(b) plans may offer a special catch-up for employees with 15 or more years of service with the same employer, as permitted under IRC § 402(g)(7).

The total contribution limit from all sources (employee and employer) is $70,000 for 2025, or 100% of the employee's compensation if their annual income is less than that amount. For instance, if an employee earns $45,000, total contributions cannot exceed $45,000 for the year.

How to choose between a 401(a) plan versus a 403(b) plan for your organization

To make an informed decision, you’ll need to consider your organization type, your workforce’s needs, and overall goals for your retirement benefits program. 

A 401(a) plan is often used by public sector employers to serve specific employee groups. The control employers have over contribution schedules, vesting, and eligibility makes it an ideal choice for organizations looking to use retirement benefits to achieve strategic goals, such as retaining high-value employees.

If you’re looking for a plan that features voluntary employee contributions and multiple contribution options for older employees, a 403(b) plan may be a better fit. A 403(b) plan can be a strong choice if your workforce values flexibility in how they save and invest for retirement. 403(b) plans often involve less complex administration and can offer a broader range of investment options, which can be attractive to participants. 

Learn more about Human Interest’s retirement plans

To learn more about the differences between 401(k), 401(a), and 403(b) accounts, contact Human Interest today.