Money Purchase Pension Plan

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Money Purchase Pension Plan

A money purchase pension plan is an employer-sponsored, tax-advantaged retirement plan that requires the employer to contribute a fixed percentage of each participating employee’s salary every year. Employees may also contribute and typically choose investment options from those offered by the plan.

How it works

  • Employer contributions are mandatory and based on a fixed percentage of compensation, regardless of company profits.
  • Employee accounts grow tax-deferred; employer contributions are tax-deductible to the business.
  • Employers often impose a vesting schedule; once vested, employees can access funds in retirement without the early-withdrawal penalty.
  • If you leave the employer, you can usually roll the balance into a 401(k) or an individual retirement account (IRA).
  • Some plans permit loans from the account subject to plan terms.

Contribution limits

  • Annual contribution limits are set by the IRS and adjusted periodically.
  • For tax year 2024: total contributions (employer + employee) are limited to $69,000 or 25% of an employee’s compensation, whichever is less.
  • For tax year 2025: the limit is $70,000 or 25% of compensation, whichever is less.
  • The plan differs from profit-sharing plans because the employer cannot vary its contribution with profits — the contribution obligation is fixed.

Taxes and withdrawals

  • Account balances grow tax-deferred. Distributions are taxed as ordinary income when withdrawn.
  • Withdrawals taken before age 59½ are generally subject to a 10% early-distribution penalty (unless an IRS exception applies).
  • Employers’ contributions are deductible to the business in the year they are made.

Required Minimum Distributions (RMDs)

  • Money purchase plans are subject to RMD rules.
  • The RMD age is 73 for 2024 and will rise to 75 in 2033 under current law.

Pros and cons

Pros:
* Provides predictable, employer-funded retirement savings that can materially increase an employee’s retirement assets.
Attractive recruiting and retention tool for employers.
 Tax-deferred growth for participants and tax deductions for employers.

Cons:
* Employer must make consistent contributions even during lean business years.
Administrative and compliance costs can be higher than for some other plan types.
 Investment performance determines the ultimate retirement benefit; contributions alone don’t guarantee outcomes.

How it compares to other plans

  • Defined contribution plan: Like 401(k)s, the retirement benefit depends on contributions plus investment returns.
  • Unlike profit-sharing plans, employer contributions are required at a set rate rather than being discretionary.
  • Employees can often roll balances into other qualified plans (401(k), IRA) when changing jobs.

Who benefits most

  • Employers seeking a structured, predictable retirement contribution model.
  • Employees who want employer-funded retirement savings and tax-deferred growth.

For decisions about adopting or participating in a money purchase plan, consult a tax advisor or retirement-plan professional to understand plan design, compliance obligations, and how limits and rules apply to your situation.