Key Takeaways
- Employers make fixed, mandatory annual contributions.
- Retirement benefit depends on contributions plus investment returns.
- No hardship withdrawals; funds accessible at retirement.
- Tax-deferred growth; employer contributions are tax-deductible.
What is Money Purchase Pension Plan?
A money purchase pension plan (MPP), also known as a money purchase pension plan, is a defined contribution retirement plan where employers are required to make fixed annual contributions to each eligible employee's account. Unlike profit-sharing plans, contributions are mandatory and based on a set percentage of compensation, ensuring steady retirement savings regardless of company profits.
This structure provides tax advantages by allowing contributions to grow tax-deferred until withdrawal, impacting your overall take-home pay and retirement readiness.
Key Characteristics
Money purchase pension plans have distinct features that differentiate them from other retirement accounts:
- Mandatory Employer Contributions: Employers must contribute a fixed percentage of each employee’s pay, often between 5% and 10%, regardless of business performance.
- Defined Contribution Structure: Retirement benefits depend on the total contributions plus investment returns, not guaranteed payouts.
- Investment Options: Contributions can be invested in various assets, including stocks and bonds, similar to those found in low-cost index funds.
- Eligibility and Vesting: Plans often have vesting schedules requiring several years before employer contributions are fully owned by employees.
- Contribution Limits: Contributions are limited to the lesser of 25% of compensation or an annual IRS cap, ensuring compliance with tax laws.
How It Works
In a money purchase pension plan, your employer contributes a predetermined percentage of your salary annually to a retirement account. These contributions accumulate over time, growing tax-deferred until retirement.
You may have limited options to contribute personally, but your employer’s consistent funding helps build a reliable retirement nest egg. The funds are typically invested in mutual funds or ETFs, similar to those recommended in the best ETFs for beginners guide, aiming for growth over the long term.
Examples and Use Cases
Money purchase pension plans are suitable for stable companies seeking predictable retirement contributions. Examples include:
- Large Corporations: Employers like Delta use defined contribution plans to provide steady retirement benefits to employees.
- Small to Mid-size Businesses: Firms that prefer fixed funding obligations may adopt MPPs to manage long-term employee benefits effectively.
- Self-Employed Individuals: Some entrepreneurs use these plans to maximize tax-deferred retirement savings with predictable contributions.
Important Considerations
While money purchase pension plans offer stability and tax advantages, they also come with mandatory funding that may strain cash flow during downturns. Employers must also handle administrative requirements such as filing annual returns and nondiscrimination testing.
Employees should understand vesting schedules and the lack of hardship withdrawal options, which differ from 401(k) plans. Reviewing plan details alongside concepts like ability to pay taxation can help clarify the plan’s impact on your finances.
Final Words
A money purchase pension plan guarantees employer contributions, providing a reliable way to build retirement savings linked to investment performance. Review your current or potential plan’s contribution levels and vesting rules to ensure it aligns with your long-term retirement goals.
Frequently Asked Questions
A Money Purchase Pension Plan (MPP) is a defined contribution retirement plan where employers make fixed, mandatory annual contributions, usually a percentage of each employee's pay. The retirement benefit depends on the total contributions plus investment gains or losses, rather than a guaranteed payout.
Employers must contribute a fixed percentage of each eligible employee's compensation annually, as defined by the plan document. These contributions are placed into individual accounts and invested, growing over time based on market performance.
Employee contributions are optional and depend on the specific plan. However, the primary funding comes from the employer’s mandatory fixed contributions.
Money Purchase Pension Plans are available to businesses of all sizes, including self-employed individuals and tax-exempt organizations. Eligibility and vesting schedules vary, often requiring 2 to 6 years for full ownership of employer contributions.
Distributions typically begin at retirement age and can be taken as a lump sum, lifetime annuity, or repayable loans within five years. Unlike 401(k) plans, hardship withdrawals are not allowed.
Contributions are limited to the lesser of 25% of an employee's compensation or an annual IRS cap, which adjusts for inflation. For example, the limit is $70,000 for 2025.
Employer contributions are tax-deductible as business expenses, and employee accounts grow tax-deferred until withdrawal. Withdrawals are taxed as ordinary income during retirement.
Pros include potential for large account balances due to fixed contributions and tax-deferred growth. Cons include higher administrative costs, mandatory funding regardless of company profits, no hardship withdrawals, and vesting periods delaying access to funds.
