What Is a Money Purchase Pension Plan?

A Money Purchase Pension Plan (MPPP) is an employer-sponsored retirement plan that helps employees save for their future. It functions as a qualified retirement plan, adhering to specific Internal Revenue Service (IRS) rules and offering tax advantages. These plans are designed to provide a structured approach to retirement savings, with employers funding employee accounts. Such arrangements can be a part of an employer’s overall benefits package aimed at attracting and retaining talent.

Defining a Money Purchase Pension Plan

A Money Purchase Pension Plan is a type of defined contribution plan where employers are required to make fixed, annual contributions to each eligible employee’s account. This mandatory contribution is a distinguishing feature, as employers must contribute a set amount or percentage of an employee’s salary each year, regardless of the company’s profitability. This contrasts with other plans, such as profit-sharing plans, where employer contributions can be discretionary. The plan document specifies the exact contribution formula, which cannot be altered without amending the plan.

Contributions made by employers to a Money Purchase Pension Plan are tax-deductible for the business. For employees, these contributions are not considered taxable income at the time they are made, allowing the funds to grow on a tax-deferred basis. Taxes are only paid when the employee withdraws funds during retirement. This deferred taxation helps accelerate the compound growth of retirement savings over time.

Money Purchase Pension Plans fall under the Employee Retirement Income Security Act (ERISA), which sets standards for most private industry retirement plans. This legal framework ensures certain protections for employees and dictates various operational requirements. The retirement benefit an employee receives from an MPPP depends directly on the total contributions made to their account and the investment earnings or losses accumulated over time.

Key Features of Money Purchase Plans

The employer is obligated to contribute a predetermined percentage of each eligible employee’s annual compensation, typically ranging from 5% to 25% of their pay. This contribution is non-discretionary, meaning it must be made consistently each year even if the business experiences low profitability or losses. For example, a plan might require a 10% contribution of an employee’s salary, which the employer must deposit into the employee’s individual account.

Employee ownership of employer contributions in these plans is governed by vesting schedules. While employee contributions are always immediately 100% vested, employer contributions typically follow a schedule that dictates when an employee gains full ownership. Common vesting methods include “cliff vesting,” where an employee becomes 100% vested after a specific period, such as three years, or “graded vesting,” where ownership gradually increases over several years. If an employee leaves before being fully vested, they may forfeit the non-vested portion of employer contributions.

Participants in a Money Purchase Pension Plan typically have control over how their funds are invested within the options provided by the plan. Employees bear the investment risk, meaning the final value of their account at retirement depends on the performance of their chosen investments. While employees generally do not contribute their own pre-tax salary deferrals to an MPPP, some plans may allow for after-tax employee contributions.

Distributions from a Money Purchase Pension Plan are generally permitted upon retirement, termination of employment, or in specific circumstances like disability or death. Participants can typically begin withdrawing funds without penalty at age 59½. Withdrawals made before this age may be subject to a 10% early distribution penalty, in addition to regular income taxes, unless an exception applies. Funds are taxed as ordinary income upon withdrawal, and required minimum distributions (RMDs) must begin at a certain age.

The portability of funds allows employees to transfer their vested account balances to other qualified retirement accounts, such as an Individual Retirement Account (IRA) or a new employer’s retirement plan, upon leaving their job. This feature helps employees consolidate their retirement savings and continue to grow their assets even when changing employers. The transfer process, often called a rollover, allows the funds to maintain their tax-deferred status.

Establishing and Maintaining a Money Purchase Plan

Establishing a Money Purchase Pension Plan involves several foundational steps for an employer. A formal written plan document must be adopted, outlining the plan’s specific rules, including eligibility requirements, the fixed contribution formula, and the vesting schedule. The employer will also need to establish a trust to hold the plan’s assets, ensuring they are separated from business funds and managed for the sole benefit of participants. It is common for employers to work with a qualified plan administrator or financial institution during this setup phase, as these professionals can guide decisions on plan features and ensure compliance with complex regulations.

Ongoing administration of a Money Purchase Pension Plan requires continuous commitment from the employer, who serves as the plan sponsor. A primary responsibility is making timely and accurate annual contributions according to the plan’s defined formula. Failure to meet these funding obligations can result in penalties, such as excise taxes. Maintaining precise records of contributions, investment activity, and participant account balances is also necessary for compliance and proper oversight.

Employers must ensure the plan adheres to all applicable rules and regulations, including those set forth by ERISA and the IRS. This involves regular monitoring to confirm the plan operates in a non-discriminatory manner, benefiting all eligible employees, not just highly compensated individuals. Providing required disclosures and statements to employees about their plan accounts and features is another administrative duty.

Annual compliance filings with regulatory bodies are mandatory for Money Purchase Pension Plans. Most plans are required to file Form 5500 Series annually with the Department of Labor (DOL) and the IRS. These forms provide detailed financial and operational information about the plan.