Money Purchase Pension|
Overview What is a Money Purchase Pension Plan? Why is a Money Purchase Pension Plan attractive to small businesses? What is the deadline for establishing a Money Purchase Pension Plan? What are the employer's responsibilities? What contribution amount is tax-deductible to the employer? Are loans available from the plan? Eligibility Who can establish a Money Purchase Pension Plan? What are the eligibility requirements? What is the deadline for establishing a Money Purchase Pension Plan? Distributions When can an employee take a distribution from the Money Purchase Pension Plan? Are there any taxes or penalties on distributions? |
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What is a Money Purchase Pension Plan?
A Money Purchase Pension Plan is a qualified retirement plan established by an employer to allow for tax-deductible contributions of up to 25% of total compensation paid to all eligible employees. The maximum contribution that any individual may receive is 100% of includable compensation to a maximum of $41,000. This amount is limited by the overall maximum permitted to be contributed to the plan - 25%. The contribution percentage is established in the plan adoption agreement and is inflexible. The adoption agreement must be amended to change the contribution percentage. Like the Profit Sharing Plan, the Money Purchase Pension Plan can generally be implemented and administered without substantial setup charges and expensive annual administrative fees. |
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Why is a Money Purchase Pension Plan attractive to small businesses? For plan years beginning after December 31, 2001 Money Purchase Pension plans will be less advantageous vs. Profit Sharing Plans than they have been. Potential plan sponsors may not want to establish a Money Purchase Pension Plan; the Profit Sharing Plan may be an equally beneficial option. The employee enjoys an employer funded benefit plan that offers the ability to accumulate more assets than through a Traditional IRA, and tax-deferred growth of investments while in the plan. |
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What is the deadline for establishing a Money Purchase Pension Plan? The plan must be established by the last day of the employer's fiscal year, although funding may be deferred until the employer's tax-filing deadline, including filed-for extensions. |
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What are the employer's responsibilities?
The employer is considered the "plan sponsor," and as such is responsible for overseeing the continuing compliance of the plan with current laws. In addition, records must be kept of each participant's share of ownership in plan assets, eligibility, vesting, and any outstanding loans. With the exception of employers who have no common-law employees other than a spouse and total plan assets of less than $100,000, all plans must file an annual 5500 report. Most employers find that hiring an accountant or independent plan administrator is the most effective way to avoid any oversights of these responsibilities. |
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What contribution amount is tax-deductible to the employer? The employer may deduct all contributions up to 25% of the compensation paid to each employee covered under the plan. |
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Are loans available from the plan? Participants may take loans from the plan as long as the employer elects to allow loans in the plan adoption agreement. |
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Who can establish a Money Purchase Pension Plan?
Corporations (S & C type), self-employed individuals, partnerships and non-profit organizations can establish a Money Purchase Pension Plan. |
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What are the eligibility requirements? An employer may wish to restrict plan eligibility in order to reward those employees with longer tenure. This is permissible within certain limits. The plan may exclude employees who have not attained age 21 and those with less than two years of service (a year of service is generally defined as 1,000 hours within the plan year). It is more common to establish a one year service requirement which allows a vesting schedule to be applied to contributions, because employees restricted from participating in the plan for more than a year become 100% vested upon entry into the plan. The plan may also exclude non-resident aliens and employees covered under a collective bargaining agreement, as well as entire subsidiaries, divisions, locations or classifications of employees as long as the plan covers a certain minimum percentage of all nonhighly compensated employees. |
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What is the deadline for establishing a Money Purchase Pension Plan? The plan must be established by the last day of the employer's fiscal year, although funding may be deferred until the employer's tax-filing deadline, including filed-for extensions. |
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When can an employee take a distribution from the Money Purchase Pension Plan? An employee must experience a "qualifying event" to gain access to his/her Money Purchase Pension Plan account assets. Distributions can only be made in the following circumstances: |
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Are there any taxes or penalties on distributions? All distributions will be taxable as income to the recipient, except for distributions attributable to after-tax contributions. Generally, distributions prior to age 59 1/2 are subject to a 10% early withdrawal penalty in addition to income taxes. Please consult your tax advisor for more complete information and additional penalties. |
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