What is the money purchase plan?

Definition and Example of Money Purchase Plan

A money purchase plan is a type of defined contribution retirement plan where the employer is required to contribute a certain percentage of the employee’s salary each year.

How Do Money Purchase Plans Work?

Companies of any size can offer money purchase plans to their employees. These plans can be offered individually or alongside other types of retirement plans.

How Much Can I Contribute?

The total annual contribution to a money purchase plan is limited to the lesser of: 25% of employee earnings or $57,000 for 2021 and $58,000 for 2022 (the same maximum contribution limit as other defined contribution retirement plans).

Money Purchase Plan vs. 401(k) Plan

In a money purchase plan, employers must contribute a specific amount of employee wages, while employees can also contribute if allowed. In contrast, in a 401(k) plan, employers can decide how much money will be distributed to employees each year.

Advantages and Disadvantages of Money Purchase Plans

Advantages: Include tax benefits, significant account balances, stable payouts, and incentives for hiring.

Disadvantages: Include administrative costs, high burden testing, excise taxes, and required contributions.

Sources:
Internal Revenue Service,
Internal Revenue Service,
Bingham, Osborn & Scarborough, LLC,
Internal Revenue Service,
U.S. Bureau of Labor Statistics,
Cornell Law School Legal Information Institute,
Internal Revenue Service,
Internal Revenue Service,
Internal Revenue Service,
Internal Revenue Service,
U.S. Department of Labor.

Source: https://www.thebalancemoney.com/money-purchase-plan-2894276