This is a retirement arrangement where the employer commits to a set contribution each year, rather than choosing what to put in as profits allow.
That commitment is the whole character of it. It suits a business with predictable profits and an intention to commit, and it sits awkwardly with one whose results vary, because the contribution is required in the lean years as well as the good ones.
This covers what the arrangement is, its key features, how it compares with the more flexible alternatives, who it suits, the tax treatment, and what setting one up involves.
What Is a Money Purchase Pension Plan?
A Money Purchase Pension Plan (MPPP) is a type of defined contribution retirement plan in which the employer is required to make a fixed annual contribution, a set percentage of each eligible employee's compensation, regardless of whether the business was profitable that year.
This mandatory commitment distinguishes MPPPs from profit-sharing plans, where contributions are discretionary and can be zero in a bad year.
The question to settle before choosing this is how stable your ability to contribute really is. An arrangement that fixes the contribution suits predictable profits and a wish to commit. Where profit varies, the flexibility of the alternative is usually worth more than the certainty.
Anu Gupta, CA, EA, B.Tech · LinkedInKey Features of an MPPP
| Feature | Description |
|---|---|
| Contribution type | Employer-only (employees do not contribute to an MPPP) |
| Contribution amount | Fixed percentage of compensation, set in plan document (e.g., 10% of each employee salary) |
| Mandatory nature | Employer MUST contribute the defined percentage each year regardless of profit |
| 2025 annual addition limit | $69,000 or 25% of compensation, whichever is less |
| Tax treatment (employer) | Contributions are deductible as a business expense |
| Tax treatment (employee) | Contributions not includable in employee's taxable income; tax-deferred growth |
| Vesting | Plan document specifies vesting schedule; cliff or graded |
MPPP vs. Profit-Sharing Plan
These two plan types are commonly confused. The key difference is the obligation:
| Factor | MPPP vs. Profit-Sharing |
|---|---|
| Contribution obligation | MPPP: mandatory fixed %; Profit-sharing: discretionary, can be zero |
| Business risk | MPPP: must contribute even in loss years; Profit-sharing: no obligation |
| Employee predictability | MPPP: employees can rely on contribution; Profit-sharing: uncertain |
| Flexibility | MPPP: low; Profit-sharing: high |
| Common use today | MPPP: less common than before; Profit-sharing: very common |
Historically, MPPPs were common standalone plans. Today, many businesses prefer profit-sharing plans or combine a profit-sharing component with a 401(k) for maximum flexibility.
MPPP vs. 401(k) Plan
| Factor | MPPP vs. 401(k) |
|---|---|
| Who contributes | MPPP: employer only; 401(k): primarily employee with optional employer match/contribution |
| Employee choice | MPPP: employees make no contribution decision; 401(k): employees elect deferral % |
| Contribution type | MPPP: defined % of pay; 401(k): up to $23,500 employee deferral |
| Combined use | An employer can have both an MPPP and a 401(k); combined limit applies |
Who Benefits Most From an MPPP?
- Professional practices with stable, predictable income (law firms, medical groups, accounting firms)
- Businesses with consistent margins that can commit to a mandatory contribution
- Owners who want to provide a guaranteed employer contribution to attract and retain employees
- Owner-employees of small corporations who want to maximize retirement contributions without requiring employee deferrals
Pro Tip: For a self-employed business owner with no employees, a Solo 401(k) typically allows higher total contributions with more flexibility than an MPPP alone. Consult a financial advisor to model both options.
Tax Advantages
MPPPs carry significant tax benefits for both employer and employees:
- Employer: contributions are 100% deductible as a business expense in the year made
- Employee: employer contributions are not included in the employee's current taxable income
- Investment growth: earnings within the plan grow tax-deferred until distribution
- Required Minimum Distributions: participants must begin taking distributions by age 73
Setting Up an MPPP
- Draft a written plan document (typically done by a third-party administrator or benefits attorney)
- Set the contribution percentage (must be the same for all eligible employees)
- Establish a trust to hold plan assets
- Select a custodian or investment manager
- File Form 5500 annually with the IRS (required for plans with assets)
- Notify employees of their plan participation and annual statement
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Frequently Asked Questions
Can I have an MPPP and a 401(k) at the same time?
Yes. An employer can maintain both plans simultaneously. However, the total annual addition (employer contributions + employee deferrals) for any one participant cannot exceed the 415(c) limit ($69,000 for 2025). The 401(k) deferral counts toward this limit.
What happens if the business cannot afford to make the MPPP contribution in a lean year?
This is the core risk of an MPPP. The employer is legally obligated to make the defined contribution. Failure to contribute as required can disqualify the plan, triggering taxes and penalties for all participants. If you are uncertain about future cash flows, a profit-sharing plan offers more flexibility.
Are MPPPs still commonly used?
MPPPs have declined in popularity as profit-sharing plans and 401(k) plans have become more sophisticated. However, they remain relevant for specific situations, particularly professional practices that want to guarantee retirement contributions and can reliably commit to the annual obligation.
What administrative work does running one of these create?
More than a simple arrangement and less than people fear, but it is ongoing rather than one-off. Expect an annual return for the plan, participant disclosures, testing to confirm the plan operates within its rules, and records showing that each contribution was calculated and made correctly. Most employers use a third party administrator for this. The obligation remains the employer's, so the administrator's work still needs reviewing.
What should we consider before choosing this over the alternatives?
How stable your ability to contribute is, and how much flexibility you want to keep. Arrangements that fix the contribution suit a business with predictable profits and a wish to commit; arrangements that allow discretion suit one where the profit varies. Because the choice is difficult to reverse cheaply, it is worth modelling several years rather than the current one, and taking advice specific to your workforce.
Written by
Anu Gupta, CA, EA, B.Tech
Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn
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