Money Purchase Pension Plans
A money purchase pension plan operates like a profit sharing plan. The
major difference is that, unlike profit sharing plans where employers are
permitted to make discretionary contributions each year, the employer has
a set contribution rate which is stated in the plan document. These
mandatory contributions must be made each year regardless of the
employer's profits. Failure to make a contribution can result in the
imposition of penalties.
Contributions are generally based on a fixed percentage of each
employee's compensation. For tax deduction purposes, the company
contribution cannot exceed 25% of compensation to a maximum annual limit
($44,000 in 2006 and $45,000 in 2007). The contribution may be
integrated with Social Security which results in larger contributions for
higher paid employees.
Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA"), profit sharing plans were limited to 15% of compensation while
money purchase plans were permitted to make contributions as high as
25%. A combination money purchase pension plan and profit sharing plan
was sometimes used to limit mandatory contributions while retaining the
ability to make larger contributions in good years. The increased profit
sharing deduction limit gives employers the ability to make larger
contributions to profit sharing plans and may render the money purchase
pension plan obsolete.
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