What Is a Money Purchase Plan & How Does It Work?

A Money Purchase Plan (MPP) is an employer-sponsored retirement plan designed to help employees save for their future. It is classified as a defined contribution plan, meaning the employer’s contribution to each employee’s account is predetermined. This plan provides a structured method for employers to fund employee retirement savings, with contributions growing based on investment performance within individual accounts.

Core Characteristics of Money Purchase Plans

A defining characteristic of a Money Purchase Plan is the mandatory nature of employer contributions. Employers must contribute a fixed percentage of each eligible employee’s compensation to their retirement account, regardless of company profitability or financial performance. This commitment distinguishes MPPs from other plans, such as profit-sharing plans, where contributions are discretionary and dependent on company earnings.

As a defined contribution plan, the employer’s commitment is to the contribution amount, not the final benefit received by the employee. Contributions are allocated to separate, individual accounts for each employee, and the value of these accounts fluctuates based on investment performance. This structure means that employees typically bear the investment risk, as the eventual retirement benefit depends on how well the investments perform over time.

Funds contributed to an employee’s account typically become theirs through vesting. Vesting outlines the schedule under which an employee gains full ownership rights to the employer’s contributions. This ensures employees gradually earn a non-forfeitable right to the money contributed on their behalf, even if they leave the company before retirement.

Contribution Rules and Employee Benefits

Employers establish a specific formula for contributions in a Money Purchase Plan, typically expressed as a fixed percentage of an employee’s annual compensation, such as 5% or 10%. This percentage is set within the plan document and must be adhered to consistently for all eligible participants. The predetermined nature of these contributions provides clarity for both the employer and the employees regarding expected annual allocations.

Employer contributions are subject to annual limits set by the Internal Revenue Service under Internal Revenue Code Section 415. For 2025, the maximum amount contributed to an employee’s account from all sources (employer, employee, forfeitures) is generally limited to the lesser of 100% of compensation or $69,000.

Vesting schedules determine when an employee gains full ownership of employer contributions. Common schedules include “cliff vesting,” where an employee becomes 100% vested after a specific period (e.g., three years of service), and “graded vesting,” where an employee becomes partially vested each year (e.g., 20% after two years, increasing to 100% after six years).

Participants can access funds upon reaching retirement age, terminating employment, or in cases of disability. Distribution options include a lump-sum payment, periodic installments, or an annuity, which provides regular payments over a set period or for life. Funds can also be rolled over into another qualified retirement plan, such as a 401(k), or an Individual Retirement Account (IRA), allowing for continued tax-deferred growth.

Money Purchase Plans may include provisions for participant loans, allowing employees to borrow from their vested account balance. These loans must typically be repaid with interest within five years, or longer for a primary residence purchase, and are subject to limits like the lesser of $50,000 or 50% of the vested account balance.

Establishing and Administering a Plan

Establishing a Money Purchase Plan begins with employer decisions on plan structure. Employers determine employee eligibility requirements, such as age and service conditions, establish the precise contribution formula (a fixed percentage of compensation), and choose the vesting schedule outlining how employees gain ownership of contributions.

Many employers work with third-party administrators (TPAs) or recordkeepers to manage their Money Purchase Plan. These professionals assist with plan design, ensure compliance with complex regulations, and handle day-to-day administrative tasks, allowing employers to focus on core business operations.

A formal written plan document must be established to legally define the Money Purchase Plan. This document outlines all plan provisions, including eligibility rules, contribution formula, vesting schedules, and distribution policies. It serves as the legal blueprint for the plan’s operation and must comply with applicable federal laws and regulations.

Following plan adoption, employers have ongoing procedural and compliance responsibilities. An annual return/report, Form 5500, must be filed with the Department of Labor and the IRS for most plans, providing detailed information about the plan’s financial condition, investments, and operations.

Employers sponsoring Money Purchase Plans are fiduciaries under the Employee Retirement Income Security Act, with duties to act solely in the best interests of plan participants and beneficiaries. Ongoing administration involves accurately calculating and remitting contributions, maintaining participant records, and distributing required notices, such as the Summary Plan Description, to employees.

Employers must ensure their plan passes annual non-discrimination testing, verifying it does not disproportionately favor highly compensated employees. This testing ensures equitable benefits for all participants. Employers also need procedures for amending the plan document to reflect changes in laws or company policy, and for formally terminating the plan if circumstances require.