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A Money Purchase Plan – The Basics & Benefits Explained

A money purchase plan is an employer-sponsored retirement plan in which companies are required to contribute a certain percentage of an employee’s salary each year, regardless of profitability. Money purchase plans, because of the guaranteed contribution, can be appealing options for employers seeking to attract and retain key employees, though they can be costly to maintain. In this article, we will discuss the basics and benefits of money purchase plan.

What Is Money Purchase Plan?

Money purchase plans, like 401(k)s and 403(b)s, are employer-sponsored, defined-contribution retirement plans. Contributions to money purchase plans, like other workplace retirement plans, grow tax-deferred, and employer contributions may be tax-deductible.

Money purchase plans differ from more well-known plans in several important ways:

  • The employer, not the employee, makes the majority of contributions to a money purchase plan. Employees can use the plan’s options to decide how to invest their contributions. Employee contributions are permitted in some money purchase plans. Employees may be required to contribute when employee contributions are offered.
  • A money purchase plan’s annual contributions are fixed. The plan documents specify the percentage of an employee’s salary that will be contributed to the plan each year by the employer. Employer contributions, unlike profit sharing plans or certain 401(k) matches, are not affected by the company’s profitability throughout the year.
  • Vesting schedules are common in money purchase plans. Because the employer bears the majority or all of the contribution burden, employers want to ensure that employees don’t just take a job to rack up employer contributions and then leave. A vesting schedule specifies when an employee will be able to access certain percentages of a money purchase plan. Vesting is a common feature in 401(k) plans, with half requiring some level of vesting for employer contributions.

How Much Can You Put Into a Money Purchase Plan?

The IRS has set annual limits for all employer and employee contributions to money purchase plans. The limits for 2022 are the lesser of: 25% of the eligible employee’s salary, or $61,000 (in 2023, $66,000).

Companies that offer any type of defined contribution plan must exercise caution to avoid becoming top-heavy, favoring highly compensated employees over employees with lower annual salaries.

A plan is considered top-heavy if the company’s owners and highly compensated employees own more than 60% of the total assets of the money purchase plan. If a company’s plan is discovered to be top-heavy, the plan may lose its “qualified plan” status, subjecting both the employer and participating employees to significant tax penalties.

Money purchase plans are frequently offered in conjunction with profit sharing or 401(k) plans, but employer contributions are restricted to the above-mentioned maximums across all accounts. Employees, on the other hand, can contribute the maximum amount to their 401(k)s while also receiving the maximum employer contribution across all of their retirement accounts.

What Is the Difference Between a Money Purchase Plan and a 401(k)?

Certain similarities exist between money purchase plans and 401(k) plans.

“Both necessitate extremely efficient use of time and money on the part of business owners,” says Brian Halbert, a retirement specialist at Pensionmark. “Both plans necessitate a significant amount of administration and record-keeping on the part of both the employer and the employee. Likewise, both are effective vehicles for workers to save toward  withdrawal.” Other similarities include:

Money Purchase Plan

  • Employer contributions are set at a predetermined percentage of employee salary.
  •  Contributions may be required if employee contributions are permitted.
  • Contributions accumulate tax-free.
  • Contributions will be capped at $61,000 in 2022 ($66,000 in 2023).
  • To avoid excise taxes, employers must meet annual minimums.
  •  When an employee leaves their company, they can carry over their balance.


  • Employers can choose to “match” or make a non-matching contribution to employee contributions, but neither is required.
  • Employees are not required to participate in the plan.
  •  Contributions compound tax-free.
  • In 2022, annual contributions are limited to $61,000, or $67,500 if you are 50 or older. These limits will be raised to $66,000 in 2023, or $73,500 if you are 50 or older.
  •  Employers are not required to make any contributions to the plan.
  • When an employee leaves their company, they can roll over their 401(k).

Despite the many similarities between money purchase plans and 401(k)s, employers appear to be gravitating toward their more well-known (and more flexible) counterparts.

“At the moment, many employers are opting for 401(k) plans for two main reasons: streamlined technology and administration, and lower costs,” Halbert explains” In recent times, the( benefits) assiduity has seen a truly  inconceivable reduction in total cost within the 401( k) plan  request.”

What are the Positive Aspects of a Money Purchase Plan?

Money purchase plans provide several unique benefits to both employers and employees that are not found in other types of defined-contribution plans.

“The employer’s ‘forced’ savings are the most advantageous aspect of a money purchase plan,” says Halbert. “By implementing a money purchase plan, the employer commits to assisting the employee in saving. When combined with other plans such as a 401(k) or profit sharing plan, the employee can save significant amounts of money each year while the employer can improve its talent and culture.”

When used in conjunction with a 401(k), money purchase plans may also allow employees to contribute more to their own retirement (k). While the same employer cannot contribute more than 25% of an employee’s salary or $61,000 in 2022 ($66,000 in 2023), an employee can contribute more to their 401(k) and money purchase plans, according to Ben Dobler, CFP, an enrolled agent with Stewardship Financial Counsel.

What Are the Negative Aspects of Money Purchase Plans?

Employers face the greatest disadvantage of money purchase plans. Employers are required to contribute a set percentage of their employees’ salaries each year, regardless of how well they perform. Money purchase plans may be more expensive than other defined-contribution plans due to this, as well as higher administrative costs.

The most significant disadvantage of a money purchase plan for employees is the possibility of being required to contribute a certain percentage of their salary, depending on their employer’s plan. Prospective employees may be put off by mandatory plan participation.

” For- profit businesses that want  further inflexibility with  benefactions to  workers’  withdrawal accounts  frequently choose to offer 401( k) plans  rather, which allow but don’t bear employer  benefactions,” says Dobler.

What precisely is a Money Purchase Pension Plan?

A money purchase pension plan is a type of retirement plan in which employers are required to make yearly contributions to their employees’ accounts. It ensures a steady income after retirement. Employees can either withdraw the lump sum amount upon retirement or use it to purchase an annuity.

A money purchase pension plan functions similarly to a profit-sharing plan. However, unlike profit-sharing plans, which allow annual contributions to be adjusted based on the profitability of the business, it requires employers to make fixed annual contributions. As a result, regardless of profits, employees receive a fixed percentage contribution.

To maximize the yearly allowed contribution levels, a money purchase pension plan and a profit-sharing plan can be used together. Employers typically establish a vesting schedule that governs when employees can obtain full ownership of the plan and access its funds.

Money Purchase Pension Plans Contribution Cap

Employers must state the contribution percentage in the document when establishing the money purchase pension plan.

The level of contributions is determined by the employee’s salary. Employers can contribute up to 100% of each participating employee’s salary or up to 25% of the aggregate yearly compensation of all employees benefiting from the plan, whichever is less, or $57,000 (in 2020).

Eligibility for a Money Purchase Pension Plan

Any company, regardless of size, can provide a money purchase pension plan. Companies may offer it alongside other contribution retirement plans in order to maximize allowable annual contributions.

A money purchase pension plan’s structure can be simple or complex, depending on the needs of the company. Every year, the employer must file a Form 5500 with the Internal Revenue Service. This form is the employee benefit plan’s annual return or report.

Small businesses can purchase pre-packaged plans from authorized retirement plan providers. In such cases, the plan provider administers the company’s money purchase pension plan.

The Advantages of a Money Purchase Pension Plan

  • Employers’ annual contributions are tax-deferred until they exceed a certain threshold. Contributions made to employee funds are also tax-deferred as long as no money is withdrawn.
  •  It provides participating employees with a retirement benefit, allowing them to save for retirement.
  • Companies that offer money purchase pension plans have an advantage when competing for talented employees.
  •  If the employee with full ownership of the plan reaches the age of 59 12, there is no tax penalty on the amounts withdrawn.
  •   Employees under the age of 59 12 can borrow funds from their money purchase pension plan in certain circumstances. The plan document details these events.

The Downsides of a Money Purchase Pension Plan

Workers aren’t permitted to contribute to their accounts. As a result, savings from a money purchase pension plan may be insufficient.

It does not give employers the option of adjusting annual contributions based on the company’s profits. Employers must make annual contributions even if the company is losing money.

It requires employees to make withdrawals once they reach the age of 72. Because these withdrawals are considered ordinary income, account holders must pay taxes on them.

It has higher administrative costs than other defined benefit plans offered by employers.

Money purchase retirement plan

Do you want to know how to save money for retirement? If this is the case, money purchase retirement plans may be the best option for you. Money purchase retirement plans provide several advantages that other types of savings vehicles do not. This guide will provide an overview of money purchase plans, including the various types and some tips on how to use them effectively.

What Is the Process of a Money Purchase Retirement Plan?

A money purchase plan is a type of 401(k) retirement account. Although there are some differences, these plans operate similarly to other defined contribution plans such as 401(k) and 403(b) accounts.

Regardless of the job’s pay scale, the employer must contribute to the money purchase plan every year.

Money Purchase retirement plans are also known as money purchase pensions or money purchase pension plans.

Contribution Limits for Money Purchase Plans

To calculate your total annual input, use the lesser of the two amounts below:

  •  Employee earnings are reduced by 25%.
  •  $57,000 (the same as the limit for other defined contribution plans) (the same as the limit for other defined contribution plans).

Contributions for high-income employees cannot exceed contributions for lower-income employees; otherwise, the retirement plan will lose its “qualified” status. Furthermore, the IRS conducts nondiscrimination audits to determine whether plans favor certain employees over others.

The Benefits and Drawbacks of Money Purchase Plans

These plans provide significant benefits to both employers and employees, but they also have drawbacks.


  • Employees who contribute to a money purchase plan do not pay taxes on their contributions until they withdraw them in retirement. Contributions to money purchase plans are tax-deductible for the employer, and contributors can invest their paychecks tax-free until they withdraw them from the plan.
  • On an annual basis, the contribution is deposited into each employee’s account. The contributions may grow over time, providing workers with a sizable retirement fund.
  •  Money purchase plans include a life annuity, which provides a monthly benefit for the rest of your life.


  • The employer’s deduction for a money purchase plan is limited to 25% of qualified plan participants’ income.
  •  Fees for defined contribution plans are generally higher than for simpler defined contribution plans.
  •   If your plan appears to favor those with more money, you risk losing qualified plan status and the tax benefits that come with it.
  •  You must pay an excise tax if you do not meet the minimum funding requirement.
  •   The required contribution rate obligates businesses to make payments even if their earnings are low. When things aren’t going well, this can put a strain on a company’s finances.

Money Purchase Plans Alternatives

A deferred annuity can give both the employer and the employee more control. There are no contribution limits, fewer stringent IRS rules, the same tax-deferred growth, an enhanced lifetime annuity is available, and employers may be able to deduct contributions as a tax deduction (SEP-IRA).


As an employee, you are unlikely to choose a company solely based on whether or not it offers a money purchase plan. You’ll probably prioritize company culture, career opportunities, and other retirement account options over a money purchase plan. However, if everything else is equal, these plans can be powerful incentives to choose one company over another, and money purchase plans can add strength to your retirement savings plan.

If you’re a for-profit company looking to retain top talent in a specific industry, you might consider offering a money purchase plan. Money purchase plans are definitely worth considering for your benefits portfolio if you can stomach the additional administrative costs and contribution minimums.


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