Money Purchase Pension Plans - NY
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Money Purchase Pension Plans
A money purchase plan is a type of defined-contribution plan that is similar to
a profit-sharing plan, except that the contribution amounts are fixed rather
than variable. Thus, employers are required to make annual contributions to each
employee’s account regardless of the company’s profitability for the year. These
plans can be used in conjunction with profit-sharing plans to achieve the
maximum contribution levels allowed each year.
Employers that set up money purchase plans must declare a set contribution
level each year in the plan document, based on employees’ salaries. Companies
can contribute up to 25% of the total annual compensation of all plan
participants, up to 100% of each participant’s salary or $46,000 (in 2008),
whichever is less.
Employer contributions are tax deferred as long as the amounts
are within annual limits. As with other defined-contribution plans, employee
funds accumulate tax deferred until withdrawn. It’s important to note that
employees are not given the option of contributing additional money to their own
accounts. However, they are often allowed to choose which investments will be
included in their accounts.
It is common for employers to set up vesting schedules that
dictate when an employee can claim the funds from his or her plan. When
employees are fully vested, they are able to begin taking withdrawals at the age
of 59½ without incurring a tax penalty. Employees may also borrow from their
plans before they reach 59½ if a circumstance occurs that can be identified as a
“qualifying event,” as defined in the plan document.
Withdrawals are taxed as ordinary income and must begin after
the account holder reaches the age of 70½, either as a lump sum or in minimum
annual installments based on life expectancy.
If you are a business owner and desire to attract employees
from larger corporations that offer a wide range of retirement plans, then a
money purchase pension plan may be an option for you. It allows you to
contribute high amounts on your employees’ behalf while providing you with the
added benefit of tax deductions.
This material was written and prepared by Emerald Publications. © 2007 Emerald Publications
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