Money Purchase Pension Plan

What is it?

A Money Purchase Pension Plan has contributions that are fixed, are based upon the employee's compensation, and are not affected by employer's profits.

Money Purchase Pension Plans permit employer contributions up to a maximum of 25% of the employe's compensation.  Once the employer establishes the contribution level, the amount in subsequent contributions must be maintained and may only be decreased or discontinued by a formal, prospective pronouncement under ERISA 204(h).

For example, if your plan requires that contributions be 10 percent of compensation, you must contribute this amount to your plan regardless of whether you, as the employer, had profits (or whether you, as a self-employed person, had earned income).  For all self-employed individuals, compensation is considered earned income derived from business profits. In addition, you cannot make in-service withdrawals from a money purchase pension plan.

The maximum deductible contribution to a money purchase pension plan is $40,000, or 25% of eligible compensation, whichever is less. This is the maximum that can be contributed for all defined contribution plans.