Money Purchase Plan

A Money Purchase Plan is a Defined Contribution Retirement Plan that requires the employer to contribute a fixed percentage of each employee's salary every year the plan is in effect. The contributions must be made regardless of how well the company does in a given year. In contrast, in profit-sharing plans, the employer's contribution is more flexible because it is based on annual profits.

However, some small-company employers or self-employed people create a paired plan that combines money purchase with profit sharing. Paired plans require them to add at least a minimum percentage of each employee's salary to the plan each year.

Since Money Purchase Plans have required contributions. That is, you, as the employer, are required to make a contribution, on behalf of your employees (the plan participants), to the plan each year. For example, let’s say that your Money Purchase Plan has a contribution of 5% of each eligible employee’s pay. You, as the employer, need to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement.

How do Money Purchase Plans differ from profit-sharing plans?

With the profit-sharing plan, you, the employer, can decide that you’ll contribute a certain amount, say $10,000. Then, depending on the plan’s contribution formula, you allocate that $10,000 to the separate accounts of all eligible employees.

Benefits of a Money Purchase Plan:

• You can make a Money Purchase Plan as simple or as complex as you want.
• You can still have other company retirement plans.
• You can be a business of any size.

Disadvantage of a Money Purchase Plan:

• Administrative costs may be higher than other plans
• Need to test that benefits do not discriminate in favor of the highly compensated employees.
• An excise tax applies if the minimum contribution requirement is not satisfied.

Who Contributes: Employer and/or employees

Contribution Limits: The lesser of 25% of compensation or $49,000 in 2009 and 2010. Future limits are subject to cost-of-living adjustments. Filing Requirements: Annual filing of Form 5500 is required

Participant Loans: Permitted In-Service

Withdrawals: Not permitted

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