What is a Money Purchase Plan?
With a money purchase plan, the plan states the contribution percentage that is
required. 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
time of retirement.
That type of arrangement is different than, say, a profit-sharing plan. 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 the eligible employees. Also, in past years, money purchase plans had
higher deductible limits than profit-sharing plans. This is no longer the case.
If you establish a money purchase plan, you:
- Can have other retirement plans.
- Can be a business of any size.
- Need to annually file a Form 5500.
You can make a money purchase plan as simple or as complex as you want to. Pre-approved
money purchase plans are available to cut down on administrative headaches.
Pros and Cons :
- Possible to grow larger account balances than under some other arrangements.
- Administrative costs may be higher than under more basic arrangements.
- 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 employee contributions.
Contribution Limits : The lesser of 25% of compensation or $42,000 in
2005 ($44,000 in 2006 and subject to cost-of-living adjustments for later years).
Filing Requirements : Annual filing of Form 5500 is required.
Participant Loans : Permitted.
In-Service Withdrawals : Not permitted.
NOTE: The above information was provided from the
www.irs.gov website.