Money Purchase Plans
A money purchase pension plan is a "defined contribution plan," which means the amount to be contributed to the plan is limited, but the amount paid to the employee at retirement is not. The amount of the actual benefit will depend on the mandatory plan contributions and on the return earned by the investments in the plan. Contributions to a money purchase pension plan are not based on the profitability of the company, but on the amount of each participant's compensation.
To allow employees to save money for retirement. Contributions to money purchase pension plans are tax-deductible for the employer and the plans help attract and retain quality employees. This plan can be set up by any type of business, including sole proprietorships, partnerships and corporations. The business can be for-profit or not-for-profit.
All contributions are mandatory and are made by the employer. The contributions are tax deductible and are limited to 25 percent of annual compensation* or $49,000 (2011), whichever is less. The employer specifies the contribution percentage in the plan document. To be eligible for a contribution, an employee must be 21 years old and have worked for the company for the past two years. A year of service is equivalent to 1,000 hours. If a vesting schedule is used, only one year of service may be required.
Additional Information - This plan is often paired with a profit-sharing plan to offer both the higher contribution limit available with the money purchase pension plan and the flexibility of a profit-sharing plan.
The employees of Warren Wealth Management do not provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.