Uncategorized / What Is a Money Purchase Pension Plan?

What Is a Money Purchase Pension Plan?

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 plans can be attractive options for employers to attract and retain key employees, though they can be pricey for firms to maintain.

  • Contributions to a money purchase 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 how profitable the company was throughout the year. That makes the rules for a money purchase plan more rigid. You cannot adjust your contribution level as profits go up or down.
  • These plans often have vesting schedules, much like 401(k) plans do. Since you bear most or all of the contribution burden, you’ll want to make sure the employee doesn’t just take the cash and find a new job, a fear some employers have when they contribute too much cash 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 account. If the contribution percentage is 5%, you must annually contribute 5% of each participating employee’s pay to their separate account. If you don’t contribute enough to meet the minimum funding standard for the year, you must pay an excise tax.

Yearly contributions cannot exceed 25% of the employee’s salary or $58,000, whichever is less.

Still, an advantageous aspect of the plan is the forced savings, as you are committing to helping employees save. When used with other plans such as a 401(k) or a profit-sharing plan, this plan 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In a money purchase pension plan, the employee’s account balance is tax deferred until the money is withdrawn; your contribution is tax deductible.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 over into a 401(k) or an IRA.
  • Employees can’t withdraw the money 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. On retirement, the total pool of capital in the account can be used to purchase a lifetime annuity or can be withdrawn in lump sums.

A money purchase pension plan is a strong addition to a 401(k). It can be used in addition to profit sharing and along with 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 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 plans are worth considering for your benefits portfolio. We’re happy to discuss this plan and other options that may be appropriate for your company.

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