Money-purchase pension plan

From CEOpedia | Management online

Money-purchase pension plan is a plan with defined fixed contributions. When person retires, the capital can be used to buy a lifetime annuity. The plan is similar to profit-sharing plan, which however uses variable contributions. If someone has money-purchase pension plan with 3% contributions, it means that employee pays 3% of incomes to pension plan account. The percentage cannot be decreased or increased, e.g. during economic downturn [1].

The money-purchase pension plan allows higher savings than in other plans. It works better as a motivation tool, as larger sums can be transferred. There are also tax benefits. But the plan is associated with higher administrative costs [2].

Who can have a money-purchase pension plan?

Companies of all sizes can offer employees plans to buy money and can be designed very simply or very complex depending on the needs of the company. It is only required that the employer submit an IRS 5500 form each year. Small businesses may consider a pre-paid packaging plan from a qualified retirement plan provider who manages the plan on behalf of the company.Money-purchase pension plan can be offered in combination with other types of pension plans. In fact, these plans were once shared with profit-sharing plans, which gave companies the benefit of high contribution limits and some flexibility in determining the number of premiums each year. This was the case when the plans to buy money had one of the highest limits for contributions available to employees. In recent years, however, contribution limits have significantly increased in the case of much simpler types of defined contribution plans, removing most of the benefits from cash / profit sharing combinations and reducing the overall attractiveness of the money-purchase pension plan for employers.

Still, money-purchase pension plan remain attractive to employees and can be a selling point in the competitive labor market. Companies that have money-purchase pension plan may consider keeping them for this reason. Employers who want to convert a plan to buy money for another type of plan, should pay attention to the strict IRS guidelines to do this, or keep the professional plan adviser's help [3].

Money-purchase pension plan advantages and disadvantages

Thanks to the pension plan for the purchase of money, participants can retire with more savings than with other pension plans. It allows companies to raise higher amounts for employee retirement plans that can allow them to compete for talent with more generous benefits for employees that can offer larger companies. They also offer tax relief to companies. However, the plan may have higher administrative costs than other pension plans. In addition, if the minimum planned contribution is not deposited, excise duty will be charged. In addition, the pension plan for the purchase of money must be tested to ensure that employees with higher compensation are not favored over other employees.


  1. Brown S, Haley J, McGill D, Schieber S. (2005)
  2. Brown S, Haley J, McGill D, Schieber S. (2005)
  3. Gary R, Naegele J. (2011)

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Author: Klaudia Wróbel