401(a) Plan: What It Means for Employers

What it means in practice

Two meanings of one name. Section 401(a) of the Internal Revenue Code lists the requirements a retirement plan trust must meet to be "qualified." The IRS explains that when a trust is qualified under section 401(a), it obtains its exemption from income tax under section 501(a). In that legal sense, every qualified pension, profit-sharing or stock bonus plan is a 401(a) plan. The IRS describes a 401(k) as a feature of a qualified profit-sharing plan, and the Form W-2 instructions refer to "a qualified pension, profit-sharing, or stock-bonus plan described in section 401(a) (including a 401(k) plan)." In everyday HR use, though, "401(a) plan" usually names a plan built around employer contributions, or mandatory employee contributions, rather than elective salary deferrals. For the deferral-based version, see 401(k).

The money purchase design. The IRS says money purchase plans have required contributions: the plan states a contribution percentage and the employer must contribute it each year. Its example is a plan with a contribution of 5% of each eligible employee's pay, which the employer must deposit to each eligible employee's separate account. The benefit is based on the contributions and the gains or losses on the account. A profit-sharing plan is different because the employer can decide how much to contribute. The IRS adds that an excise tax applies if the minimum contribution is not made, that loans are permitted but in-service withdrawals are not, and that an annual Form 5500 is required.

Defined contribution or defined benefit. The Department of Labor says a defined benefit plan promises a specified monthly benefit at retirement, while a defined contribution plan does not promise a specific amount of benefits. Section 401(a) covers both; a money purchase plan is a defined contribution plan.

Qualification requirements the IRS lists. The IRS guide to common qualified plan requirements includes the following. Written plan, operated as written: the plan document describes who is covered and what they receive, and the employer must follow it even if the terms do not reflect its intent. Minimum participation: under section 410(a), a plan generally cannot require service beyond the later of age 21 or one year of service, and an eligible employee must enter by the earlier of the first day of the next plan year or six months after meeting those requirements. Coverage: section 410(b) requires the plan to pass a percentage, ratio or average benefit test, each built around a 70 percent benchmark. Nondiscrimination: section 401(a)(4) bars contributions or benefits that favor highly compensated employees. Vesting: section 411 sets minimum vesting, and employees must be 100% vested at normal retirement age and when the plan terminates. Limits: the section 415 limits and the section 401(a)(17) compensation cap. Exclusive benefit: plan assets must be held for the exclusive benefit of employees and their beneficiaries. The list also covers no cutbacks of accrued benefits, top-heavy rules, required distributions, joint and survivor annuities, direct rollovers, minimum funding for money purchase plans, and Form 5500 and Form 1099-R reporting.

The compensation and contribution limits. Section 401(a)(17) caps the pay a plan may count; for 2026 the IRS COLA table shows $360,000. Section 415(c) caps annual additions to a participant's defined contribution accounts at the lesser of a dollar amount ($40,000 in the statute, indexed) or 100 percent of compensation; the IRS shows $72,000 for 2026. Annual additions include employer contributions, deferrals (not catch-ups) and forfeitures across all plans of one employer and related employers. The IRS also notes that an employer's deduction for contributions to a profit-sharing or money purchase plan cannot exceed 25% of compensation paid to participating employees.

Governmental 401(a) plans. Section 414(d) defines a governmental plan, and the IRS notes that 403(b) and 457 plans, and certain 401(k) plans adopted by a governmental entity before May 6, 1986, are other kinds of governmental plans. ERISA section 4(b)(1), codified at 29 U.S.C. 1003(b)(1), says Title I does not apply to a governmental plan, so the DOL's participation, vesting, funding and fiduciary standards do not reach it. The plan still has to meet the Internal Revenue Code requirements that apply to it. For vesting, the IRS says a governmental plan must meet the pre-1974 rules and lists three safe harbor schedules: 15-year cliff, 20-year graded (5 to 20 years) and, for qualified public safety employees, 20-year cliff. Employee contributions must be fully and immediately vested.

Definitely determinable benefits. The IRS says contribution rates, allocation formulas, benefit formulas and actuarial assumptions must be fixed in the written plan. A provision that lets a board of trustees set them from time to time violates the definitely determinable requirement. The IRS also says a governmental 401(a) plan must state that no assets may be diverted from the exclusive benefit of employees before all liabilities are met, and that refunds of employer contributions are allowed only in very limited cases and only if the plan explicitly permits them.

Mandatory contributions and 414(h) pick-ups. The IRS general rule is that employer contributions are not included in employee income, but employee contributions are, unless made as elective deferrals; an amount designated as an employee contribution to a 401(a) plan is not treated as an employer contribution. Section 414(h)(2) creates an exception for governmental plans: when employee-designated contributions are "picked up" by the employing unit, they are treated as employer contributions. Under Revenue Ruling 2006-43, as the IRS summarizes it, the employer must take formal action specifying that the contributions, though designated as employee contributions, are paid by the employer, and employees must not be able to opt out or take the amounts in cash.

Pick-ups and FICA. Income tax treatment and FICA treatment are separate questions. The IRS says, citing CCA 200714018, that for a pick-up to be treated as paid by the employer for Social Security and Medicare purposes, it must be mandatory for all employees covered by the retirement system and must be a salary supplement, not a salary reduction. If the facts show the contributions reduced or offset pay, they are included in FICA wages.

Payroll and W-2 treatment. Publication 15's table of special rules lists employer contributions to a qualified plan as exempt from income tax withholding, Social Security and Medicare taxes and FUTA. The 2026 Form W-2 instructions say not to report section 414(h)(2) contributions in box 12; use box 14a instead. Box 14a may also show nonelective employer contributions, voluntary after-tax contributions, required employee contributions and matching contributions. Check the box 13 "Retirement plan" box if the employee was an active participant in a section 401(a) plan, or in a plan for federal, state or local government employees other than a section 457(b) plan. For a defined contribution plan, an employee is generally active in a year in which employer or employee contributions or forfeitures are added to the account. See Form W-2 and pre-tax deductions.

How it differs from 401(k), 403(b) and 457(b). The IRS lists each separately on its types of retirement plans page. A 401(k) lets employees contribute part of their wages by elective deferral, and 401(k) and 403(b) deferrals are capped at $24,500 for 2026. A 403(b) may be offered only by public schools, colleges and universities, churches and section 501(c)(3) organizations, and is subject to a universal availability rule for salary deferrals. A 457(b) may be established only by a state or local government or a section 501(c) tax-exempt organization, has its own $24,500 deferral limit for 2026, and is not counted for the W-2 box 13 checkbox. A money purchase 401(a) plan, by contrast, is driven by a fixed contribution formula that the employer must fund each year.

Determination letters. A favorable determination letter is the IRS's opinion that the plan document meets the qualification requirements. The IRS says it reduces the risk of disqualification on audit but does not cover operation. Individually designed plans may generally apply only for an initial letter, on termination or in limited other cases, filing Form 5300 or 5310 electronically through Pay.gov with a user fee. For governmental plans, the letter does not address whether the sponsor is eligible to sponsor a governmental plan, whether a pick-up arrangement meets section 414(h)(2), or whether an excess benefit arrangement meets section 415(m); the sponsor may request a private letter ruling instead.

Correcting mistakes. On October 22, 2026, the IRS issued Revenue Procedure 2026-34, which replaces Revenue Procedure 2021-30 and restructures the Employee Plans Compliance Resolution System. EPCRS includes the Self-Correction Program, Voluntary Correction Program and Audit Closing Agreement Program for qualified plans (IR-2026-126).

Step by step for an employer. (1) Confirm the plan type and whether the employer is governmental, since that decides whether ERISA Title I applies. (2) Read the plan's definition of eligible employees, entry dates and compensation. (3) Set up the required employer contribution and any mandatory employee contribution as a payroll deduction, coded for its tax treatment. (4) Apply the 401(a)(17) and 415 limits for the year. (5) Track vesting service and forfeitures. (6) At year end, set the W-2 box 13 checkbox and box 14a entries. (7) Keep plan documents, amendments and any determination letter on file.

Example 1 (illustration): fixed contribution. A money purchase plan requires 5% of pay. An employee paid $60,000 in 2026 receives a $3,000 employer contribution. A second employee paid $400,000 counts only $360,000 under the 2026 401(a)(17) limit, so the contribution is $18,000, well under the $72,000 annual additions limit.

Example 2 (illustration): governmental pick-up. A city plan requires a 6% employee contribution that the city formally picks up, plus a 9% employer contribution. For an employee paid $90,000, the pick-up is $5,400 and the employer contribution is $8,100, total annual additions of $13,500, under both $72,000 and 100% of pay. The $5,400 is reported in box 14a, not box 12. Whether it is also excluded from FICA wages depends on the mandatory and salary-supplement tests above.

Example 3 (illustration): box 13. An employee eligible for a defined contribution plan elects nothing, but the employer contributes to the account during the year. The W-2 instructions' decision chart says to check "Retirement plan." An employee whose only plan is a 457(b) is not checked.

Where states differ (example). State income tax may not follow the federal pick-up exclusion. New York's 2025 Form IT-201 instructions (line 21) tell public employees in listed systems, such as the New York State and Local Retirement Systems and the New York State Teachers' Retirement System, to add back 414(h) contributions shown on Form W-2, but not 401(k), 403(b) or 457 contributions. Check each state's own instructions.

Question: Is a 401(k) a 401(a) plan? Yes in the legal sense. The IRS describes a 401(k) as a feature of a qualified profit-sharing plan, and the W-2 instructions list 401(k) plans among section 401(a) plans.

Question: Does ERISA apply to a governmental 401(a) plan? Title I does not; 29 U.S.C. 1003(b)(1) excludes governmental plans. Tax qualification rules still apply.

Question: Does a determination letter approve a pick-up? No. The IRS says governmental plan determination letters do not address pick-ups; a private letter ruling is available.

Question: Are the 2027 limits out? Not as of November 2, 2026, when the IRS COLA page showed 2026 figures. Check it before applying new-year limits.

This entry does not decide whether a particular plan is qualified or how a specific contribution is taxed.

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