YOU ASK:

What are the characteristics of a money purchase pension plan?

WE ANSWER:

Money purchase pension plans are a type of retirement arrangement wherein contributions are defined and fixed. Employers are required to make contributions of a fixed percentage of each employee's compensation to their employees' money purchase pension plans.

How Money Purchase Pension Plans Work

Every participant in a money purchase pension plan has a separate account which an employer makes regular contributions to.

Employers are required to make annual contributions to their employee's money purchase accounts on behalf of the employees. In contributory money purchase pension plans, both the employer and the worker fund the plan, on an equal basis.

The contribution amount is specified in the agreement as a fixed percentage. For instance, if a 12 percent annual contribution is set in the contract, the employee and employer will have to contribute at the same rate - in this specific case, 6 percent. If minimum contributions are not made, an excise tax is imposed.

Like any other defined-contribution plan, a money purchase pension plan's growth is affected not only by the contributions made, but also by the investment performance of the account. Money purchase plans have the potential of yielding a higher return than other arrangements.

There are no restrictions as to the size of your business for a money purchase pension plan. In addition to this program, you are allowed to maintain other retirement plans.

The money purchase plan contribution limits for tax year 2010 and 2011 are $49,000 or 25 percent of employee compensation, whichever is less. The annual contribution limits are indexed for inflation for the following years.

If you need to make an early distribution, you can take out a participant loan to avoid penalties. In-service withdrawals are generally not permitted.

Money purchase plans usually have higher administrative fees than some other arrangements.

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