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Money Purchase Pension Plans (MPPPs) are employer-sponsored retirement plans with contributions based on a fixed percentage of an employee’s salary. This type of plan guarantees contributions, not benefits, which makes it different from other pension schemes. The employee’s retirement benefit is determined by the total contributions made to the plan and the investment returns generated over time.
MPPPs offer both employers and employees a structured way to save for retirement. They have clear rules around how contributions are made and the potential for growth over time. In this blog, we’ll explore the key aspects of money-purchase pension plans, including how they work, their advantages, and the specific rules surrounding their funding.
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How Do Money Purchase Pension Plans Work?
In an MPPP, employers commit to contributing a set amount to each employee’s pension fund. This amount is often calculated as a percentage of the employee’s salary, typically between 5% and 10%. The funds are then invested, and the employee benefits from the accumulated contributions and any investment growth when they retire.
Unlike defined benefit plans, where the payout is predetermined, MPPPs provide benefits based on investment performance. Employees benefit from tax-deferred growth, meaning they won’t pay taxes on contributions or earnings until they begin to withdraw funds in retirement.
Key Features of Money Purchase Pension Plans:
- Fixed Contributions: Employers contribute a set percentage of the employee’s salary.
- Investment Growth: Contributions are invested, with returns determining the final retirement benefit.
- Tax Benefits: Contributions are tax-deferred until retirement.
What Are the Money Purchase Pension Plan Funding Rules?
One of the essential aspects of MPPPs is the strict adherence to money purchase pension plan funding rules. These rules ensure that contributions are made consistently and on time. Here are the main funding rules that employers must follow:
- Fixed Contributions: Employers must contribute a predetermined amount based on the employee’s salary. The employer cannot change the contribution amount based on the company’s performance or other factors.
- Annual Contribution Limits: The Internal Revenue Service (IRS) limits the amount that can be contributed to an employee’s annual MPPP. For 2024, the contribution limit is the lesser of 100% of the employee’s compensation, or $66,000.
- Non-Discrimination Rules: Employers must ensure that contributions do not favor highly compensated employees and are made equally to all eligible employees.
What is the difference between a Money Purchase Pension Plan and a 401(k)?
A Money Purchase Pension Plan requires fixed contributions from the employer, while a 401(k) allows employees to choose how much they contribute, often with employer matching. Both plans offer tax-deferred growth, but MPPPs guarantee employer contributions, whereas 401(k) plans depend on employee participation.
How are contributions to Money Purchase Pension Plans taxed?
Contributions to MPPPs are made pre-tax, meaning employees don’t pay taxes on the money contributed until they begin withdrawals in retirement. At that point, withdrawals are taxed as ordinary income.
Can employees contribute to a Money Purchase Pension Plan?
Typically, MPPPs are funded entirely by employer contributions. Some plans may allow employees to contribute additional funds, but this is less common than other retirement plans like 401(k)s.
Benefits of Money Purchase Pension Plans
MPPPs offer several advantages for both employers and employees. For employers, these plans provide a structured, predictable way to contribute to their employees’ retirement. For employees, MPPPs offer a stable way to grow retirement savings with tax-deferred benefits.
Benefits for Employers:
- Predictable Contributions: Employers know exactly how much they will contribute each year, making budgeting easier.
- Employee Retention: A strong retirement plan can improve employee satisfaction and retention.
- Tax Deductions: Contributions to MPPPs are tax-deductible for employers.
Benefits for Employees:
- Tax-Deferred Growth: Employees benefit from tax-free growth of their contributions until retirement.
- Employer-Funded: Contributions come directly from the employer, requiring no action from the employee.
- Retirement Security: The fixed nature of employer contributions ensures consistent retirement savings.
Money Purchase Pension Plans vs. Other Retirement Plans
| Feature | Money Purchase Pension Plans | 401(k) Plans | Defined Benefit Plans |
| Contribution Source | Employer-funded | Employee-funded (with possible employer matching) | Employer-funded |
| Contribution Type | Fixed percentage of salary | The employee chooses the contribution amount | Based on a formula to provide guaranteed benefits |
| Benefit Amount | Depends on contributions and investment growth | Depends on contributions and investment growth | Pre-determined benefit at retirement |
| Tax Treatment | Tax-deferred until withdrawal | Tax-deferred until withdrawal | Tax-deferred until withdrawal |
| Flexibility | Less flexible (fixed employer contribution) | More flexible (employee determines contribution) | No flexibility (benefits are pre-determined) |
What Happens If an Employer Doesn’t Meet MPPP Funding Requirements?
Employers are legally required to meet the money purchase pension plan funding rules, and failure to do so can result in significant penalties. If contributions are not made on time or at the required level, the employer could face IRS penalties, employee lawsuits, or other legal consequences.
In addition, an employer’s failure to comply with non-discrimination rules could lead to the disqualification of the pension plan, which could create substantial tax liabilities for both the employer and the affected employees.
How Profitjets Can Help with Money Purchase Pension Plans
At Profitjets, we specialize in providing comprehensive Accounting Services, including expert advice on setting up and managing Money Purchase Pension Plans. Our team ensures compliance with all IRS requirements, helps you maximize the tax benefits of your contributions, and offers support in administering the plan to meet your employees’ needs.
Our CFO Services can guide you in creating a robust retirement plan that aligns with your company’s financial goals, ensuring you make the most of your contributions without risking non-compliance. Additionally, our Tax Services can help you optimize tax deductions related to your retirement plans, contributing to your business’s overall financial health.
Conclusion
Choosing the right retirement plan for your business depends on several factors, including your company’s size, financial health, and employee needs. Money Purchase Pension Plans offer a structured way to contribute to employee retirement while providing tax benefits for employers. However, adhering to the strict funding rules and compliance with IRS regulations is essential.
At Profitjets, we’re here to simplify the process of managing retirement plans and ensure your business remains compliant. Whether you need help with plan setup, ongoing management, or tax strategy optimization, our expert team is ready to assist.
