Plan differences

[Guest CChristy]

What is the difference between 403(B) and 401(a) accounts?

[Guest STLGiant]

Having more facts to your situation would be nice, but generally, a 403(B) account is an account of a participant in a 403(B) plan. It can be made of employee deferrals or employer contributions.

Typically a 401(a) account is an employer contribution account. It can be for a Profit Sharing, Money Purchase or Defined Benefit plan. Depending upon the fact pattern it may or may not be and individualized account--e.g. it may be a pooled account.

[mbozek]

A 401(a) plan can be established by any employer and must comply with the complex sections of 401(a) of the code. Qualified plans apply for and receive determination letters issued by the IRS approving of the tax exempt status of the plan. The plan must be amended for changes in the law.The assets must be held in trust (owned) for the participants by a trustee who is the fiduciary for the plan. (There are a few qualified plans which are funded solely by annuity contracts.) Unless the employer permits investment direction by employees in certain defined contribution plans, the fiduciary is responsibile for investment of plan assets. Also a 401(a) plan must be administered in accordance with its terms and can be disqualfied if the plan fails to comply with any of the statutory or regulatory provisions of the code in form or operation. The funds can be invested in almost any investment selected by the fiduciary unless it would be a prohibited transaction under IRC 4975.

A 403(B) plan generally can only be established by a 501©(3) organization or public school. A 403(B) plan is not a qualified plan because the assets are not held in trust by a trustee. It is literally an employer contribution to either an annuity or a custodial account invested in a mutual fund. The contributions can be made by the employee, employer or both. However, 403(B) assets cannot be invested in other types of investments unless the employee is employed by a church which may establish a trust for plan assets. 403(B) plan assets are usualy invested by the employees and are not subject to the PT rules. 403(B) plans are not subject to disqualfication because the assets are held by the individual participant not a trust. Few nondisrimination rules apply, e.g., most employees who work 20 or more hours a week have to be offered the right to make pre tax contributions and employer contributions for each year are subject to nondiscrimination requirements similar to the requirements for qualified plans. Employee pre tax contributions to 403(B) plans can be as much as $15,000 in 2002 (opposed to $12,000 for 401(k) plans). The IRS does not issue determination letters for 403(B) plans. Also a 403(B) plan is not required to be administered in accordance with its terms. It must only comply with the legal requirements for 403(B) plans and cannot be disqualified for a failure to amend the plan for changes in the law. Both types of plans must comply with the minimum distribution requirements.