What is a Money Purchase Plan?

A Money Purchase Plan is a lesser-known but powerful retirement savings vehicle that offers both employers and employees a structured approach to building retirement wealth. As a type of defined contribution plan, it stands out because of its unique feature: the employer is required to make fixed annual contributions to each eligible employee’s account, usually calculated as a percentage of the employee's salary [1] [2]. This commitment to regular contributions distinguishes Money Purchase Plans from more flexible arrangements like profit-sharing plans, where contributions can vary based on company performance [3] [4].

For employers, offering a Money Purchase Plan means committing to consistency. Whether a business experiences a stellar year or a lean one, the employer is obligated to contribute the specified amount to each employee's account [1] [3]. This requirement makes the plan a good fit for businesses with stable cash flow that can sustain predictable contributions over time. The benefit for employees is clear—they receive a reliable contribution from their employer each year, which can be an attractive aspect of their overall compensation package [2] [3].

Employees participating in a Money Purchase Plan have control over their retirement savings within the parameters of the plan. While the employer determines the contribution amount, employees typically select how their funds are invested from a range of options provided by the plan [2] [4]. The retirement outcome for employees depends on the performance of these investments, so there is an inherent investment risk. However, because the contributions are fixed and guaranteed, employees have a predictable foundation for their retirement savings [1] [3].

There are also legal considerations to keep in mind with Money Purchase Plans. Since employers are legally obligated to make the promised contributions, failure to do so can lead to penalties [1] [4]. This rigidity is the trade-off for the plan’s predictability. Employers should carefully evaluate their financial stability and commitment to the plan before opting for this structure. For businesses that value long-term planning and employee retention, a Money Purchase Plan can be a highly effective tool [2] [3].

Another important aspect of Money Purchase Plans is their contribution limits. For 2024, the maximum annual contribution limit for each employee is the lesser of 25% of the employee's compensation or $69,000 (this amount may be adjusted annually for inflation) [3] [4]. These limits provide ample room for employees to build substantial retirement savings, particularly when combined with other retirement plans an employer might offer, such as a 401(k) plan [2] [3].

In summary, a Money Purchase Plan is a defined contribution plan where the employer's commitment is central. It offers predictability for employees and a clear framework for employers who are ready to commit to steady contributions. For businesses with the resources and desire to provide a stable retirement benefit, a Money Purchase Plan can be an excellent choice [1] [3].

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References

[1] Internal Revenue Service. (2024, February 29). Choosing a Retirement Plan: Money Purchase Plan. Retrieved from https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-money-purchase-plan 

 [2] Investopedia. (n.d.). What Is a Money Purchase Plan? Definition and Benefits. Retrieved from https://www.investopedia.com/terms/m/moneypurchasepensionplan.asp 

 [3] Ion Investments. (n.d.). What Is a Money Purchase Pension Plan? Retrieved from https://www.ioninvestments.com/What-Is-a-Money-Purchase-Pension-Plan.c1037.htm 

 [4] CCH AnswerConnect. (n.d.). Money Purchase Pension Plans as Defined Contribution Plans. Retrieved from https://answerconnect.cch.com/topic/50b5bfce7cb2100095d990b11c2ac4f1017/money-purchase-pension-plans-as-defined-contribution-plans