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401(a) Retirement Plans: Have you Overlooked a Retirement Account?

Section 401(a) plans are employer-sponsored plans offered by some government and non-profit organizations. Employee contributions can be either mandatory or voluntary. Employees may withdraw the funds as a lump-sum payment, annuity, or rollover to a different retirement plan.

The FICA Alternative Retirement Plan is a section 401(a) retirement plan shared by certain Florida public university employees. Qualified employees contribute 7.5% of wages to the retirement plan in lieu of contributing to Social Security (FICA) taxes. Covered employees include adjunct faculty, other personal service (OPS), post docs, and house staff. Employee contributions are automatic and on a pre-tax basis.

What happens if you do nothing?

Because contributions are automatic, some employees might not be aware of the account’s existence. The investment provider might invest the funds into target-date funds, a default investment option. If the employee leaves the job, the investment provider will send a check equal to the remaining balance on the last day of employment. The check will be sent to the address listed in the employer’s human resources department. Bank information can be added by visiting the investment provider’s website to receive funds electronically.

Distributions from a 401(a) plan are subject to the same limitations as other retirement plans. For distributions made before the age of 59 ½, there is a 10% tax added. The IRS has information about exceptions to the tax on early distributions, for more information visit https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions. Distributions are subject to the same required minimum distribution (RMD) rules of other retirement plans beginning at the age of 70 ½.

Rollover Rules

Section 401(a) rollover rules are like other retirement plans regarding where and how the funds may be transferred. The funds may be transferred into a future employment retirement plan (such as a 401k), a traditional IRA, or a Roth IRA. Rollovers to traditional and/or Roth IRAs can be done using the direct or indirect method. Direct rollovers are done by transferring the funds from one plan to another, also known as a trustee-to-trustee transfer. Indirect rollovers are a more complicated tax process. With the indirect method, the distribution is withdrawn and transferred within 60 days to a traditional or Roth IRA account. The ordinary income tax and 10% early distribution penalty is waived on the distribution if the transfer is completed within 60 days. In addition, the employer is required to withhold 20% from the transfer for federal income taxes. If the 20% withheld exceeds tax liability, it will be refunded on the subsequent tax return.

It is important to contact your 401(a)-investment provider to determine eligibility for rollovers into future employer retirement plans or direct method rollovers. Deciding how to manage tax liability depends on your specific situation. If you are in a lower tax bracket, it might be better to rollover the funds to a Roth IRA to pay taxes now rather than pay more tax in the future. However, if you are looking to reduce tax liability in the current year, then a traditional IRA might be more suitable for you.

University of Florida has information for their employees at https://benefits.hr.ufl.edu/retirement/fica-alternative-plan/