A 403(a) plan is a special type of annuity-based retirement plan that is sponsored by your employer. Unlike 403(b) plans, which are offered only by certain non-profit companies, hospital organizations and educational institutions, any employer can choose to offer a 403(a). Roughly similar in effect to a traditional pension, 403(a) plans are usually funded by insurance company-backed annuities and can offer yearly payments.
A 401(a) annuity is an employer-sponsored plan that allows you to invest through payroll deductions – and your employer can contribute – and receive withdrawals of income at a later time.
What Are Annuities?
An annuity is an investment that pays out income. A fixed annuity, for instance, is one that makes set payments at an interval you request, typically between once a month and once a year, for as long as you've set the annuity to run. Variable annuities have different payments depending on how their investments perform.
403(a) Annuity Plans
A 403(a) annuity is offered by your employer. This means you can invest in the annuity through a payroll deduction, although you have to do it with after-tax money. Your employer can also contribute with you, if it desires and it contributes on a pretax basis.
One of the key benefits of a 403(a) annuity is that it typically doesn't have a minimum purchase amount – unlike regular annuity contracts, which may require you to invest a fixed amount to open a contract. When you withdraw from your 403(a), you'll be taxed just as you would with a 401(k) or 403(b) – all of your withdrawals will be taxable as regular income and, if you withdraw before you're 59 1/2, will also be subject to penalties as well.
Qualified Retirement Plans
The 403(a) annuity is considered a qualified retirement plan by the Internal Revenue Service. This gives it the same special status under the Employee Retirement Income Security Act of 1974 as other qualified plans, such as 401(k) and 403(b) plans. Money in your 403(a) is protected from both your creditors and from your employer's creditors. Its qualified status also is what allows your employer to contribute pretax money to it.
The 403(a) Structure
Your company can choose to structure its 403(a) plan in a number of ways. Some 403(a) plans are structured as defined benefit plans that pay a predetermined amount of money when you retire. Others are more like 401(k) plans where your returns are defined based on what you put in and on how the funds you contribute perform.
Technically, a 403(a) plan doesn't even have to include a traditional fixed annuity – it can be structured so that you buy mutual funds or bank investments – although they're still wrapped in the structure of an annuity contract.