Money Purchase Pension Plans

Money Purchase Pension Plans are similar to profit sharing plans with one major exception:

    • The contributions must be made every year regardless of earnings or profits

Unlike profit sharing plans where a discretionary contribution formula allows for flexible contributions, money purchase pension plan contributions generally are based on a fixed rate percentage of compensation.  The contributions are mandatory and failure to make a contribution can result in the imposition of penalties.

Example: ABC Company's plan formula is 4% of compensation.  ABC must contribute 4% of all eligible employees' compensation.  ABC cannot elect to make a lower contribution for a particular year nor can they decide to make a higher contribution.

Like profit sharing plans, Social Security may be taken into account to provide a proportionately larger share of plan contributions to highly compensated employees.

A combination money purchase pension plan and profit sharing plan can limit mandatory contributions while (in years prior to 2002) retaining the ability to make larger contributions in good years.  (See note below)

Note:  Effective with plan years that begin  in 2002, the contribution and deduction limits to profit sharing plans will increase. The maximum contribution the employer will be able to make, and deduct, will be the lesser of 25% of covered compensation or $46,000 (deductible 2008 contribution).  In prior years, employers had to have both a money purchase pension plan and profit sharing plan to achieve this contribution level.  Employers who currently maintain money purchase pension plans should consider freezing the current money purchase pension plan, then transferring those plan assets into their profit sharing plan.  This plan combination would still allow for maximum contributions, and would reduce annual plan administrative expenses.  An added bonus to combining these plans is that the surviving plan is the only one that has to be restated for the "GUST" requirements.  If you would like more information concerning these provisions, please contact Qualified Plan Administrators, Inc. 

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