Money Purchase Pension Plan

Money Purchase Pension Plans

A money purchase pension plan is very similar to a profit-sharing plan; however, the key difference revolves around the flexibility of payment from the employer.  As opposed to the profit sharing plan, money purchase pension plans are mandatory; meaning that the employer is guaranteeing that a certain amount of contribution (ie. 7%) will be contributed to the employee’s pension plan every year.

Rules

The maximum contribution amount that an employer can make into an employee’s money purchase pension account is the same as with the profit-sharing plan, 25% of the employee’s total compensation.  Additionally, there is a yearly cap at $45,000 and a lifetime cap of $225,000.  These caps will be adjusted over time to account for inflation.  Therefore, the employee will receive 25% of their salary or $45,000, whichever is the lesser of these two amounts.

For employers, it is very important that they not underfund or overfund the money purchase pension plan.  There are penalties for doing so.  For example, employers who underfund the pension plan can owe up to 100% of the underfunded amount in penalties.  Conversely, employers who overfund the account may be subject to a 10% penalty on the overfunded amount.