A money purchase pension plan is an employee retirement benefit plan that requires companies to contribute a specific percentage of an employee’s salary each year, regardless of the firm’s profitability.
Because of this, money purchase pension plans can be attractive options for employers to attract and retain key employees, though they can be pricey for firms to maintain.
How Contributions Are Made to Money Purchase Pension Plans
Contributions to a money purchase pension plan are primarily made by you, not your workers. Employees, though, can choose how to invest contributions using the plan’s options, some of which allow for employee contributions. When employee contributions are offered, employees may be required to kick in.
Contributions are fixed on an annual basis. Plan documents state the percentage of an employee’s salary you will contribute each year. Unlike a profit-sharing plan or even certain 401(k) matches, employer contributions don’t change based on the company’s profitability throughout the year. That makes the rules for a money purchase pension plan more rigid; you cannot adjust your contribution level as profits go up or down.
Like 401(k) plans, money purchase plans often have vesting schedules. Since you bear most or all of the contribution burden, you’ll want to make sure that employees don’t take the cash and find a new job, a fear some employers have when they contribute too much to the money purchase pension plan up front.
Employees can max out their 401(k) plans and receive the maximum employer contribution of a money purchase plan.
You must contribute a fixed percentage of each eligible employee’s salary annually to a separate money purchase pension plan account. For example, if the contribution percentage is 5%, you must contribute 5% of each participating employee’s pay annually to their separate account. You must pay an excise tax if you don’t contribute enough to meet the minimum funding standard for the year.
Yearly contributions cannot exceed 25% of the employee’s salary or $58,000, whichever is less.
Money Purchase Plans vs. 401(k)s
An advantageous aspect of the money purchase pension plan is the forced savings; you commit to helping employees save. When used with other plans such as a 401(k) or a profit-sharing plan, this allows employees to save large amounts annually while helping you boost talent.
In a money purchase pension plan, the employee’s account balance is tax-deferred until the money is withdrawn, so your contribution is tax-deductible. The rules are similar to those for any qualified retirement account:
- Employees who leave their jobs can roll the money into a 401(k) or an IRA.
- Employees can’t withdraw the funds before retirement without paying a penalty.
- An employee may take loans from the account if authorized by the employer.
The plan is designed to provide retirement income. At retirement, the total pool of capital in the account can be used to purchase a lifetime annuity or withdrawn in lump sums.
Strengthen Your 401(k) With a Money Purchase Pension Plan
A money purchase pension plan is a strong addition to a 401(k). It can be used in addition to profit sharing and other retirement plans — it’s up to the company to decide what it can afford and what is appropriate.
You might consider offering a money purchase pension plan if you’re trying to keep a particular industry’s top talent. If you can withstand the additional administrative costs and contribution minimums, money purchase pension plans are worth considering for your benefits portfolio.
Contact us to discuss money purchase pension plans and other options that may be appropriate for your company.
April 2025
