Understanding Money Purchase Plans: Basics, Benefits, and Differences with 401(k)

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A money purchase plan is a retirement plan where employers contribute a fixed percentage of an employee’s salary annually, regardless of profitability. This plan is attractive for employers looking to retain key employees, but it can be expensive. Check this article for more information on money purchase plans.

What Is Money Purchase Plan?

Money purchase plans, such as 401(k)s and 403(b)s, are employer-sponsored retirement plans. Contributions grow tax-deferred, and employer contributions may be tax-deductible.

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

  • Employers make most contributions to money purchase plans, giving employees the choice to invest their own contributions. Some plans allow employee contributions if required.
  • A money purchase plan has fixed annual contributions. The employer contributes a specified percentage of an employee’s salary each year, regardless of the company’s profitability.
  • Vesting schedules are prevalent in money purchase plans. Employers use them to prevent employees from only taking the job to receive contributions and then quitting. These schedules determine when employees can access portions of the plan. 401(k) plans commonly include vesting, with 50% requiring it 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 top-heavy if the owners and highly paid employees own over 60% of the assets. If discovered as top-heavy, the plan can lose its “qualified plan” status, resulting in tax penalties for the employer and employees.

Money purchase plans are often offered with profit sharing or 401(k) plans, but employers can only contribute up to the maximum limit. However, employees can contribute the maximum amount to their 401(k)s and receive the maximum employer contribution for all 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.

Brian Halbert, a retirement specialist at Pensionmark, states that both retirement plans require efficient use of time and money by business owners. Both plans also require significant administration and record-keeping by the employer and employee. Additionally, both plans are effective for workers to save for withdrawal.

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.

“Employers now prefer 401(k) plans due to technology, cost savings,” says Halbert. “The 401(k) plan costs have significantly decreased recently.”

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.

Halbert believes that the employer’s “forced” savings in a money purchase plan are very beneficial. This plan helps the employee save, and when combined with other plans, such as 401(k) or profit sharing, it allows the employee to save a lot of money while also benefiting the employer’s talent and culture.

When paired with a 401(k), money purchase plans enable employees to contribute more to their retirement. Employers can contribute up to 25% of an employee’s salary or $61,000 in 2022 ($66,000 in 2023), but employees can contribute more to their 401(k) and money purchase plans. This information was shared by Ben Dobler, CFP, an enrolled agent with Stewardship Financial Counsel.

What Are the Negative Aspects of Money Purchase Plans?

Employers have a disadvantage with money purchase plans as they must contribute a set percentage of employee salaries each year, regardless of performance. This makes money purchase plans more expensive compared to other defined-contribution plans.

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 retirement plan where employers contribute yearly to employees’ accounts for a steady income after retirement. Employees can withdraw a lump sum or use it to buy an annuity.

A money purchase pension plan is like a profit-sharing plan, but with fixed annual contributions from employers. Unlike profit-sharing plans, it doesn’t adjust contributions based on business profitability. Instead, employees receive a fixed percentage contribution regardless of profits.

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

Want to save money for retirement? Consider money purchase retirement plans. They offer advantages other savings options don’t. This guide provides an overview of money purchase plans and tips on using 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 gives employers and employees more control with no contribution limits, less strict IRS rules, tax-deferred growth, an enhanced lifetime annuity option, and potential tax deductions for employers (SEP-IRA).


When choosing a company to work for, employees generally consider factors like company culture, career opportunities, and retirement account options. While a money purchase plan may not be a top priority, it can be a strong incentive if all other factors are equal and can help boost retirement savings.

Consider offering a money purchase plan to retain talent in a specific industry. Despite the added costs and contribution minimums, it is worth including in your benefits portfolio.

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