Money purchase plans have required contributions. Employers are required to make a contribution, on behalf of the plan participants, to the plan each year.
With a money purchase plan, the plan states the contribution percentage that is required. For example, let’s say that your money purchase plan has a contribution of 5% of each eligible employee’s pay. The employer, needs to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement.
If you establish a money purchase plan, you:
• Can have other retirement plans.
• Can be a business of any size.
• Need to annually file a Form 5500.
An employer can make a money purchase plan as simple or as complex as they want. Pre-approved money purchase plans are available to cut down on administrative headaches.
Pros and Cons:
• Possible to grow larger account balances than under some other arrangements.
• Administrative costs may be higher than under more basic arrangements.
• Need to test that benefits do not discriminate in favor of the highly compensated employees.
• An excise tax applies if the minimum contribution requirement is not satisfied.
Who Contributes: Employer and/or employee contributions.
Contribution Limits: The lesser of 25% of compensation or $49,000 in 2009 and 2010 (subject to cost-of-living adjustments for later years).
Filing Requirements: Annual filing of Form 5500 is required.
Participant Loans: Permitted.
In-Service Withdrawals: Not permitted.