What is a Money Purchase Pension Plan?

A Money Purchase Pension Plan is a type of defined contribution plan where the employer is required to make a contribution, typically based on each participant’s compensation.

What are some unique characteristics of a Money Purchase Pension Plan?

Contributions are not dependent on profits.

Contributions are mandatory, so the company must make a contribution even during years in which there is no profit.

Contributions are required every year the plan is in effect.

Contributions are not flexible, so the company must make different contribution amounts in good years or bad.

Contributions are not required for every employee.

Contributions are subject to allocation conditions, so some employees may not receive a contribution.

Contributions are tax deductible, so the company can use its plan as a tax planning tool with their CPA.

Are Money Purchase Pension Plans a good option today?

Money Purchase Pension Plans are generally considered obsolete except in very specific circumstances.

In previous years, a Money Purchase Pension Plan Sponsor would generally establish both a Profit Sharing Plan and a Money Purchase Plan in order to take advantage of special rules that would allow for the employer to take highest tax deduction possible (25% of total compensation) for company contributions.

In 2001, the passage of EGTRRA made the tax deductible limit for all defined contribution plans 25% of total compensation and therefore eliminated the need to have this two plan arrangement to achieve this limit.

Therefore, in order to save time and cost on Money Purchase plan administration matters many Plan Sponsors subsequently merged their Money Purchase Pension Plan into their Profit Sharing Plan.

Generally, there is little need for this arrangement unless the employer wants to demonstrate their commitment to making contribution to the Money Purchase Pension plan to their employees (e.g. Union Employees).

How can Trinity Pension Consultants help?

If you currently sponsor a Money Purchase Plan, Trinity Pension Consultants can help:

• Revisit the original intent behind establishing the Money Purchase Pension plan and to examine if those reasons still exist today
• Demonstrate how the Profit Sharing Plan has replaced the Money Purchase Pension Plan because of its flexibility in contributions and allocations
• Provide the necessary documentation and administration to consolidate your Money Purchase Pension Plan into your Profit Sharing plan – saving you time and money

For more information on how Trinity Pension Consultants can help you with a Money Purchase Pension Plan, call Anthony Warren at 330-869-3747.