Ohio National Financial Services, ON-Trac II, Unit XXI: Qualified Retirement Plans

Though it is the most traditional form of defined contribution retirement plan, the money purchase pension plan is no longer a popular choice. With the maximum contribution limits for other types of defined contribution plans elevated to substantial levels, why would an employer select a plan option that obligates it to making fixed contributions? Money purchase pension plans are best suited for businesses with steady profits and are popular with collective bargaining groups. Businesses can achieve many of the same benefits of a money purchase plan without the hard funding commitment with a profit sharing plan.

With a money purchase plan, employer contributions must be made each year on behalf of each participating employee, according to a plan formula that defines the amount of the contribution. This allocation formula can be expressed as a flat dollar amount or, more commonly, as a percentage of compensation. The contribution formula remains constant, unless amended, and contributions must be made regardless of profits.

Due to the increase in contribution limits for other forms of defined contribution plans, money purchase pension plans are far less common today than they once were.

Money Purchase Key Points:

The employer is obligated to contribute the amount defined in the plan.
Ideal for small businessowners that need or want a fixed formula contribution commitment.

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