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 Distributions are taxed as ordinary income when withdrawn.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.